Reporting

Question 1

207. A CPA has performed an examination of the generalpur
     pose fi nancial statements of Big City. The examination
     scope included the additional requirements of the Single
     Audit Act. When reporting on Big City’s internal account ing
     and adminis trative controls used in administering a fed eral
     fi nancial assis tance program, the CPA should
     a. Communicate those weaknesses that are material in
     rela tion to the general-purpose fi nancial state ments.
     b. Express an opinion on the systems used to ad minister
     major federal fi nancial assistance pro grams and
     express negative assurance on the sys tems used to
     administer nonmajor federal fi nancial assistance
     programs.
     c. Communicate those weaknesses that are material in
     rela tion to the federal fi nancial assistance pro gram.
     d. Express negative assurance on the systems used to
     ad minister major federal fi nancial assistance programs
     and express no opinion on the systems used
     to admin ister nonmajor federal fi nancial assistance
     programs.

Answer 1

207. (c) The requirement is to identify the correct state ment
     which would communicate weaknesses in internal control used
     in administering a federal fi nancial assistance program when
     a CPA has examined the general purpose fi nancial statements
     of a municipality. The AICPA Ac counting and Audit Guide,
     Audits of State and Local Gov ernmental Units, requires the
     communication of weaknesses that are material in relation to
     the federal fi nancial assistance program

Question 2

205. Kent is auditing an entity’s compliance with
     requirements governing a major federal fi nancial assistance
     program in accord ance with the Single Audit Act. Kent detected
     noncompliance with requirements that have a material
     effect on that program. Kent’s report on compliance should
     express a(n)
     a. Unmodifi ed opinion with a separate emphasis-ofmatter
     paragraph.
     b. Qualifi ed opinion or an adverse opinion.
     c. Adverse opinion or a disclaimer of opinion.
     d. Limited assurance on the items tested.

Answer 2

205. (b) The requirement is to identify the appropriate
     compli ance report under the Single Audit Act when a CPA has
     detected noncompliance with requirements that have a material
     effect on that program. AU-C 806 states that under such
     circum stances the auditor should express a qualifi ed or adverse
     opinion.

Question 3

206. When performing an audit of a city that is subject to
     the requirements of the Uniform Single Audit Act of 1984, an
     auditor should adhere to
     a. Governmental Accounting Standards Board Gen eral
     Standards.
     b. Governmental Finance Offi cers Association
     Gov ernmen tal Accounting, Auditing, and Financial
     Reporting Principles
     c. General Accounting Offi ce Government Auditing
     Stand ards.
     d. Securities and Exchange Commission Regulation
     S-X.

Answer 3

206. (c) The requirement is to identify the source of authorita
     tive guidance for performing audits of a city that is
     subject to the requirements of the Uniform Single Audit Act
     of 1984. Answer (c) is correct because while the AICPA’s
     generally ac cepted auditing standards must be followed to
     the extent they are pertinent, the General Accounting Offi ce
     Government Auditing Standards must also be adhered to. The
     other replies all relate to standards not directly related to the
     Uniform Single Audit Act.

Question 4

196. Which of the following statements is a standard
     ap plicable to fi nancial statement audits in accordance with
     Government Auditing Standards (the “Yellow Book”)?
     a. An auditor should report on the scope of the audi tor’s
     testing of internal controls.
     b. All instances of abuse, waste, and mismanagement
     should be reported to the audit committee.
     c. An auditor should report the views of responsible
     of fi cials concerning the auditor’s fi ndings.
     d. Internal control activities designed to detect or prevent
     fraud should be reported to the inspector gen eral.

Answer 4

196. (a) The requirement is to identify the correct statement
     with respect to a fi nancial statement audit conducted in
     accord ance with Government Auditing Standards (the “Yellow
     Book”). Answer (a) is correct because the auditor issues
     a report on com pliance with laws and internal control, and a
     report on the fi nan cial information. Answer (b) is incorrect
     because not all in stances of abuse, waste and mismanage ment are so reported. Answer (c) is incorrect because the views
     of offi cials are not re ported. Answer (d) is incorrect because
     internal control activi ties designed to detect or pre vent fraud
     are not reported to the inspector general.

Question 5

197. In reporting under Government Auditing Standards, an
     auditor most likely would be required to report a falsifi ca tion
     of accounting records directly to a federal inspector general
     when the falsifi cation is
     a. Discovered after the auditor’s report has been made
     available to the federal inspector general and to the
     public.
     b. Reported by the auditor to the audit committee as a
     sig nifi cant defi ciency in internal control.
     c. Voluntarily disclosed to the auditor by low-level person
     nel as a result of the auditor’s inquiries.
     d. Communicated by the auditor to the auditee and the
     au ditee fails to make a required report of the matter.

Answer 5

197. (d) The requirement is to identify the circumstance
     in which an auditor is required to report a falsifi cation of
     accounting records directly to a federal inspector general.
     Answer (d) is correct because under Government Auditing
     Standards a falsifi cation of accounting records must ordinarily
     be communicated by the auditor to the auditee and, if the
     auditee fails to make ap propriate disclosure, by the auditor to a
     federal inspector general. Answers (a), (b), and (c) all provide
     inaccurate descriptions of auditor reporting respon sibility.
     See Government Auditing Standards (the “Yellow Book”) for
     information on reporting un der Government Au diting Standards.

Question 6

198. Although the scope of audits of recipients of federal
     fi nan cial assistance in accordance with federal audit regulations
     varies, these audits generally have which of the fol lowing
     elements in common?
     a. The auditor is to determine whether the federal fi nancial
     assistance has been administered in accor dance
     with applicable laws and regulations.
     b. The materiality levels are lower and are determined
     by the government entities that provided the fed eral
     fi nancial assistance to the recipient.
     c. The auditor should obtain written management re p resentations
     that the recipient’s internal auditors will report
     their fi ndings objectively without fear of political
     repercussion.
     d. The auditor is required to express both positive and
     neg ative assurance that illegal acts that could have a
     material effect on the recipient’s fi nancial state ments
     are disclosed to the inspector general.

Answer 6

198. (a) The requirement is to identify a common aspect
     of various types of audits of recipients of federal fi nancial
     assistance in accordance with federal audit regulations. Answer
     (a) is cor rect because audits of recipients of federal
     fi nancial assistance include reports on (1) the fi nancial
     statements, and (2) a sepa rate or combined report on internal
     control and on compliance with laws and regulations.
     An swer (b) is incorrect because mate riality levels are not
     ordi narily lower or always determined by the governmental
     en tity. Answer (c) is incorrect because the auditor need not
     obtain such written management representations. An swer (d)
     is incorrect because requirements for reporting il legal acts may
     vary depending upon the type of audit being performed. AU-C
     806 provides requirements related to audit ing entities that
     have received governmental fi nancial assis tance. In addition,
     guidance is provided by Government Auditing Standards
     (GAS), also referred to as the “Yellow Book,” published by the
     Comp troller General of the United States.

Question 7

199. An auditor most likely would be responsible for com municating
     signifi cant defi ciencies in the design of internal control
     a. To the Securities and Exchange Commission when
     the client is a publicly held entity.
     b. To specifi c legislative and regulatory bodies when
     re porting under Government Auditing Standards.
     c. To a court-appointed creditors’ committee when the
     cli ent is operating under Chapter 11 of the Fed eral
     Bankruptcy Code.
     d. To shareholders with signifi cant infl uence (more than
     20% equity ownership) when signifi cant defi ciencies
     are deemed to be material weaknesses.

Answer 7

199. (b) The requirement is to identify to whom an auditor
     most likely would be responsible for communicating
     signifi cant defi ciencies in the design of internal control.
     Answer (b) is cor rect because in audits under Government
     Auditing Standards, signifi cant defi ciencies in the design of
     internal control are com municated to legislative and regulatory
     bodies (AU-C 806). Answer (a) is incorrect because the
     Securities and Exchange Commission does not ordinarily
     receive information on such defi ciencies. Answer (c) is
     incorrect because while a court-ap pointed creditors’ committee
     might in some circumstances re ceive information on
     such defi ciencies, this practice is not as frequent as is done
     under Government Auditing Standards. An swer (d) is incorrect
     because shareholders do not normally re ceive reports on
     signifi cant defi ciencies or material weaknesses (see AU-C 265).

Question 8

200. Wolf is auditing an entity’s compliance with require ments
     governing a major federal fi nancial assistance pro gram in accordance with Government Auditing Standards. Wolf detected
     noncompliance with requirements that have a material effect on
     the program. Wolf’s report on compliance should express
     a. No assurance on the compliance tests.
     b. Reasonable assurance on the compliance tests.
     c. A qualifi ed or adverse opinion.
     d. An adverse or disclaimer of opinion

Answer 8

200. (c) The requirement is to determine the opinion which
     an auditor should express in a report on compliance when s/he
     has detected material instances of noncompliance within
     the program. AU-C 806 defi nes these instances of
     ma terial noncom pliance as failures to follow requirements,
     or violations of regula tions or grants which cause the auditor
     to conclude that the total of the misstatements resulting from
     these failures or violations is material to the fi nancial statements.
     Therefore, answer (c) is correct because the auditor
     should issue a qualifi ed or an adverse opinion. Answer (a) is
     incorrect because the auditor is required under Governmen tal
     Auditing Standards to provide reasonable assurance on the entity’s compliance with the applicable laws and regula tions.
     Answer (b) is incorrect because the auditor must dis close the
     instances of noncompliance. Answer (d) is incor rect because
     the auditor should not disclaim an opinion as a result of
     noncompliance.

Question 9

201. Which of the following is a specifi c documentation
     require ment that an auditor should follow when auditing in
     accordance with Government Auditing Standards?
     a. The auditor should obtain written representations
     from management acknowledging responsibility for
     correcting instances of fraud, abuse, and waste.
     b. Before the report is issued, evidence of supervisory
     re view of the audit.
     c. The auditor should document the procedures that
     as sure discovery of all illegal acts and contingent
     liabili ties resulting from noncompliance.
     d. The auditor’s working papers should contain a ca veat
     that all instances of material misstatements and fraud
     may not be identifi ed.

Answer 9

201. (b) The requirement is to determine a documentation
     requirement that an auditor should follow when auditing in accordance
     with (also referred to as the “Yellow Book”). An swer (b)
     is correct because Government Auditing Stan dards require
     documentation of supervisory review before the report is issued

Question 10

202. In performing a fi nancial statement audit in accor dance
     with Government Auditing Standards, an auditor is required
     to report on the entity’s compliance with laws and regulations.
     This report should
     a. State that compliance with laws and regulations is the
     re sponsibility of the entity’s management.
     b. Describe the laws and regulations that the entity must
     comply with.
     c. Provide an opinion on overall compliance with laws
     and regulations.
     d. Indicate that the auditor does not possess legal skills
     and cannot make legal judgments.

Answer 10

202. (a) The requirement is to identify the statement that
     should be included in an auditor’s report on an entity’s compli
     ance with laws and regulations when performing an audit
     in ac cordance with Government Auditing Standards. Answer
     (a) is correct because such compliance reports require a
     statement that management is responsible for compliance with
     laws, regulations, contracts, and grants. See AU-C 806 for this
     requirement and others.

Question 11

203. In reporting under Government Auditing Standards, an
     auditor most likely would be required to communicate management’s
     misappropriation of assets directly to a federal
     inspec tor general when the fraudulent activities are
     a. Concealed by management by circumventing spe cifi c
     in ternal controls designed to safeguard those assets.
     b. Reported to the entity’s governing body and the governing
     body fails to make a required report to the federal
     inspector general.
     c. Accompanied by fraudulent fi nancial reporting that
     re sults in material misstatements of asset balances.
     d. Perpetrated by several levels of management in a
     scheme that is likely to continue in future years.

Answer 11

203. (b) The requirement is to determine when an auditor
     reporting under would most likely be required to communi cate
     management’s misappropriation of assets directly to a federal
     inspector general. Answer (b) is correct because Government
     Auditing Standards requires that when a governing body fails
     to make a required report on such acts the auditors should communicate
     the matter to the external body specifi ed in the law or
     regulation. Answer (a) is incorrect because such concealment
     will not necessarily lead to com munication to a federal inspector
     general. Answer (c) is incorrect because material misstatement
     does not necessarily lead to such communication. Answer (d)
     is incorrect because the expected duration of the scheme is not
     what leads to reporting to a federal inspector general.

Question 12

204. In auditing compliance with requirements governing
     major federal fi nancial assistance programs under the Single
     Audit Act, the auditor’s consideration of materiality differs
     from materiality under generally accepted auditing stan d ards.
     Under the Single Audit Act, materiality is a. Calculated in relation to the fi nancial statements taken
     as a whole.
     b. Determined separately for each major federal fi nancial
     assistance program.
     c. Decided in conjunction with the auditor’s risk as sessment.
     d. Ignored, because all account balances, regardless of
     size, are fully tested.

Answer 12

204. (b) The requirement is to identify the auditor’s proper
     measure of materiality for major federal fi nancial assistance
     pro grams under the Single Audit Act. AU-C 806 requires that
     it be determined separately for each major pro gram.

Question 13

187. Mill, CPA, was engaged by a group of royalty reci pients
     to apply agreed-upon procedures to fi nancial data supplied
     by Modern Co. regarding Modern’s written asser tion about its
     compliance with contractual requirements to pay royalties. Mill’s report on these agreed-upon procedures
     should contain a(n)
     a. Disclaimer of opinion about the fair presentation of
     Modern’s fi nancial statements.
     b. List of the procedures performed (or reference thereto)
     and Mill’s fi ndings.
     c. Opinion about the effectiveness of Modern’s inter nal
     control activities concerning royalty payments.
     d. Acknowledgment that the suffi ciency of the procedures
     is solely Mill’s responsibility.

Answer 13

187. (b) The requirement is to identify the information provided
     in an agreed-upon procedures report on compliance with
     contractual requirements to pay royalties. Answer (b) is correct
     because agreed-upon procedures reports include a list of the
     procedures performed (or reference thereto) and fi ndings.
     An swer (a) is incorrect because no such disclaimer of opinion
     is provided in an agreed-upon procedures report. Answer (c) is
     incorrect because no opinion is included in an agreed-upon
     pro cedures report. Answer (d) is incorrect be cause an agreedupon
     procedures report includes a statement disclaiming an
     opinion on the suffi ciency of procedures, not an acknowledgement
     of the suffi ciency of the procedures. See AT 201 for
     guidance on agreed-upon procedures en gagements.

Question 14

188. A CPA’s report on agreed-upon procedures related to an
     entity’s compliance with specifi ed requirements should contain
     a. A statement of limitations on the use of the report.
     b. An opinion about whether management’s assertion is
     fairly stated.
     c. Negative assurance that control risk has not been assessed.
     d. An acknowledgment of responsibility for the suffi -
     ciency of the procedures.

Answer 14

188. (a) The requirement is to identify the statement that is
     included in a CPA’s report on agreed-upon procedures on management’s
     assertion about an entity’s compliance with specifi ed
     requirements. Answer (a) is correct because such an agreedupon
     procedures report includes a statement of limitations on
     the use of the report because it is intended solely for the use
     of specifi ed parties. See AT 601 for in formation that should be
     included in such an agreed-upon procedures report. Answer (b)
     is incorrect because no “opinion” is included. Answer (c) is incorrect
     because a sum mary of fi ndings, not negative assurance
     is provided. An swer (d) is incorrect because the CPA makes no
     representation regarding the suffi ciency of procedures.

Question 15

189. When reporting on an examination of a company’s
     compli ance with requirements of specifi ed laws, the practitioner
     has identifi ed an instance of material noncompliance.
     Management has agreed to include this instance in its writ ten
     assertion. The examination report should include
     a. No modifi cation from the standard form.
     b. An opinion paragraph that is unmodifi ed, and an
     empha sis-of-matter paragraph.
     c. A qualifi ed or adverse opinion.
     d. A disclaimer of opinion.

Answer 15

189. (c) The requirement is to identify the correct statement
     concerning an examination report when management
     has properly disclosed an instance of material noncom pli ance.
     AT 601 states that the opinion should be qualifi ed or adverse.
     Note that AT 601 requires the CPA’s report to relate directly to
     the subject matter when the opinion is modifi ed.

Question 16

190. In auditing a not-for-profi t entity that receives governmental
     fi nancial assistance, the auditor has a responsibility to
     a. Issue a separate report that describes the expected
     bene fi ts and related costs of the auditor’s suggested
     changes to the entity’s internal control.
     b. Assess whether management has identifi ed laws and
     reg ulations that have a direct and material ef fect on
     the entity’s fi nancial statements.
     c. Notify the governmental agency providing the
     fi nan cial assistance that the audit is not designed to
     provide any assurance of detecting misstatements and
     fraud.
     d. Render an opinion concerning the entity’s contin ued
     eli gibility for the governmental fi nancial as sistance

Answer 16

190. (b) The requirement is to determine an auditor’s
     respon sibility when auditing a not-for-profi t entity that
     re ceives governmental fi nancial assistance. Answer (b) is
     correct because AU-C 806 requires that the auditor assess
     whether management has identifi ed laws and regulations
     that have a direct and material effect on the entity’s fi nancial
     statements; AU-C 806 also pre sents procedures to be followed
     in assessing such laws and regu lations. Answer (a) is incor rect
     because such a separate report describing expected ben efi ts
     and costs does not need to be issued. Answer (c) is incorrect
     because the CPA will not notify the governmental agency that
     the audit is not designed to provide assurance. Answer (d) is incorrect because the CPA does not express an opinion on
     the entity’s continued eligibility for gov ernmen tal fi nancial
     assistance. AU-C 806 presents requirements re lating to
     compliance auditing for governmental entities and recipients
     of governmental fi nancial assistance.

Question 17

191. Hill, CPA, is auditing the fi nancial statements of Help ing
     Hand, a not-for-profi t organization that receives fi nan cial assistance
     from governmental agencies. To detect mis statements in
     Helping Hand’s fi nancial statements re sulting from violations
     of laws and regulations, Hill should focus on violations that a. Could result in criminal prosecution against the organi
     zation.
     b. Involve signifi cant defi ciencies to be communicated
     to the organization’s trustees and the funding
     agencies.
     c. Have a direct and material effect on the amounts in
     the organization’s fi nancial statements.
     d. Demonstrate the existence of material weaknesses

Answer 17

191. (c) The requirement is to determine the focus of an
     auditor’s attention in detecting misstatements resulting from
     violations of laws and regulations when auditing a not-forprofi
     t organization that receives fi nancial assistance from
     governmental agencies. Answer (c) is correct because the
     focus of such proce dures should be on violations that have a
     direct and material effect on the amounts in the organiza tion’s
     fi nancial statements (AU-C 806). Answers (a), (b), and (d)
     all represent a focus that is not as accurate as that provided in
     answer (c).

Question 18

192. A governmental audit may extend beyond an examination
     leading to the expression of an opinion on the fairness of
     fi nancial presentation to include
     Program
     results Compliance
     Economy and
     effi ciency
     a. Yes Yes No
     b. Yes Yes Yes
     c. No Yes Yes
     d. Yes No Yes

Answer 18

192. (b) The requirement is to determine the proper
     scope of a governmental audit. The General Accounting
     Offi ce’s “Yellow Book” suggests that in addition to fi nancial
     statements, such an audit may include consideration of
     (1) program results, (2) compliance with laws and regula tions,
     and (3) economy and effi ciency.

Question 19

193. When auditing an entity’s fi nancial statements in
     ac cor dance with Government Auditing Standards (the “Yel low
     Book”), an auditor is required to report on
     I. Noteworthy accomplishments of the program.
     II. The scope of the auditor’s testing of internal controls.
     a. I only.
     b. II only.
     c. Both I and II.
     d. Neither I nor II.

Answer 19

193. (b) The requirement is to identify whether an auditor
     performing an audit in accordance with Government
     Auditing Standards (the “Yellow Book”) is required to report
     on notewor thy accomplishments of the program, the scope of
     the auditor’s testing of internal controls, or both. An swer (b)
     is correct be cause the “Yellow Book” requires re porting only
     upon the scope of the auditor’s testing of inter nal controls.
     Answers (a), (c), and (d) all include an incor rect combination
     of reporting replies.

Question 20

194. When auditing an entity’s fi nancial statements in accord
     ance with Government Auditing Standards (the “Yellow
     Book”), an auditor is required to report on
     I. Recommendations for actions to improve operations.
     II. The scope of the auditor’s tests of compliance with
     laws and regulations.
     a. I only.
     b. II only.
     c. Both I and II.
     d. Neither I nor II.

Answer 20

194. (b) The requirement is to identify whether an audi tor
     performing an audit in accordance with Government Auditing
     Standards (the “Yellow Book”) is required to report on recommendations
     for actions to improve operations, the scope of
     tests of compliance with laws and regulations, or both. Answer
     (b) is correct because the “Yellow Book” re quires reporting
     upon the scope of the auditor’s tests of compliance with
     laws and regula tions. Answers (a), (c), and (d) all include an
     incorrect combina tion of reporting replies

Question 21

195. Which of the following statements is a standard
     applica ble to fi nancial statement audits in accordance with
     Government Auditing Standards (the “Yellow Book”)?
     a. An auditor should report on the scope of the audi tor’s
     testing of compliance with laws and regula tions.
     b. An auditor should assess whether the entity has
     re portabl e measures of economy and effi ciency that
     are valid and reliable.
     c. An auditor should report recommendations for
     ac tions to correct problems and improve operations.
     d. An auditor should determine the extent to which the
     en tity’s programs achieve the desired results.

Answer 21

195. (a) The requirement is to identify the correct statement
     with respect to a fi nancial statement audit conducted in
     accord ance with Government Auditing Standards (the “Yellow
     Book”). Answer (a) is correct because the auditor issues
     a report on com pliance with laws and internal control, and a
     report on the fi nan cial information. Answer (b) is incorrect
     because a fi nancial statement audit does not address econ omy
     and effi ciency in the manner suggested. Answer (c) is incorrect
     because recommen dations for actions to correct problems and
     improve operations are not ordinarily in cluded. Answer (d) is
     incorrect because a fi nancial state ment audit does not address
     whether programs are achieving the desired results

Question 22

177. In an integrated audit, what must the auditor
     communicate to the audit committee?

Known material
weaknesses
                              All control
                            defi ciencies
a. Yes Yes
b. Yes No
c. No Yes
d. No No

Answer 22

177. (b) The requirement is to specify what types of
     defi ciencies must be communicated by the auditor to the
     audit committee. Answer (b) is correct because the auditor
     must communicate material weaknesses and other signifi cant
     defi ciencies, but not all control defi ciencies. Answer (a) is
     incorrect because control defi ciencies that are not signifi cant
     need not be communicated to the audit committee (unless
     the auditor has made an agreement to communicate them).
     Answers (c) and (d) are incorrect because known material
     weaknesses must be communicated to the audit committee and
     control defi ciencies that are not signifi cant defi ciencies need
     not be communicated.

Question 23

178. In which manner are signifi cant defi ciencies
     communicated by the auditors to the audit committee under
     Public Company Accounting Oversight Board requirements?
     a. The communication may either be orally or in written
     form.
     b. The communication must be oral, and not in written form.
     c. The communication must be in written form.
     d. No such communication is required as only material
     weaknesses must be communicated

Answer 23

178. (c) The requirement is to determine the manner in
     which signifi cant defi ciencies are communicated by the
     auditor to the audit committee under PCAOB requirements.
     Answer (c) is correct because the PCAOB requires a written
     communication. Answer (a) is incorrect because a written
     communication is required. Answer (b) is incorrect because the
     communication must be in a written form, not in an oral form.
     Answer (d) is incorrect because both material weaknesses and
     signifi cant defi ciencies must be communicated.

Question 24

179. Which is correct concerning the external auditors’ use of
     the work of others in an audit of internal control performed for
     a public company?
     a. It is not allowed.
     b. The work of internal auditors may be used, but only
     when those internal auditors report directly to the
     audit committee.
     c. Ordinarily the work of internal auditors and others is
     used primarily in low-risk areas.
     d. There is no limitation and is likely to reduce auditor
     liability since the auditors will then share legal responsibility
     with those who have performed the service.

Answer 24

179. (c) The requirement is to identify the correct statement
     concerning the external auditors’ use of the work of others
     when performing an audit of internal control of a public
     company. Answer (c) is correct because, after assuring
     themselves as to the competence and objectivity of the internal
     auditors and others, the external auditors may use their work—
     particularly in low-risk areas and when that work is supervised
     and/or reviewed. Answer (a) is incorrect because using the
     work of internal auditors and others is allowed. Answer (b) is
     incorrect because there is no such requirement of reporting to
     the audit committee, although this is one indication of internal
     auditor objective. Answer (d) is incorrect because there are
     limitations, and because it is uncertain whether liability will be
     shared.

Question 25

180. In an integrated audit, which must the auditor communicate in writing to management? a. Only material weaknesses. b. Material weaknesses and signifi cant defi ciencies. c. Material weaknesses, signifi cant defi ciencies and other control defi ciencies. d. Material weaknesses, signifi cant defi ciencies, other control defi ciencies, and all suspected and possible employee law violations.

Answer 25

180. (c) The requirement is to identify the information that must be communicated in writing to management. Answer (c) is correct because in an integrated audit all material weaknesses, signifi cant defi ciencies, and other control defi ciencies must be reported to management. Answers (a) and (b) are incorrect because they are incomplete. Answer (d) is incorrect because “all suspected and possible employee law violations” need not be communicated

Question 26

181. Which of the following is correct when applying a topdown approach to identify controls to test in an integrated audit? a. For certain assertions, strong entity-level controls may allow the auditor to omit additional testing beyond those controls. b. Starting at the top—controls over specifi c assertions— the auditor should link to major accounts and reporting items. c. The goal is to focus on details of accounting controls, while avoiding consideration of overall entity-level controls. d. The goal is to focus on all controls related to assertions, omitting consideration of controls related to the fi nancial statements.

Answer 26

181. (a) The requirement is to identify a correct statement about applying a top-down approach to identify controls to test in an integrated audit. Answer (a) is correct because certain effective entity-level controls may allow the auditor to omit additional testing beyond those controls. Answer (b) is incorrect because starting with assertions does not represent starting at the top (starting at the top includes consideration of the fi nancial statements and entity-level controls fi rst). Answer (c) is incorrect because consideration of entity-level controls cannot be avoided. Answer (d) is incorrect because not all controls related to assertions need to be focused upon, and because one may not omit controls related to the fi nancial statements.

Question 27

182. Which of the following is not included in a standard unqualifi ed opinion on internal control over fi nancial reporting performed under PCAOB requirements? a. Because of inherent limitations, internal control over fi nancial reporting may not prevent or detect misstatements. b. In our opinion, [company name] maintained, in all material respects, effective internal control over fi nancial reporting. c. Our audit included obtaining an understanding of internal control over fi nancial reporting. d. The [company name] management and audit committee is responsible for maintaining effective internal control over fi nancial reporting.

Answer 27

182. (d) The requirement is to identify the statement not included in a standard unqualifi ed opinion on internal control performed under PCAOB requirements. Answer (d) is correct because the report indicates that management is responsible for maintaining effective internal control over fi nancial reporting, not management and the audit committee. Answers (a), (b) and (c) are all incorrect because they represent statements included in the audit report

Question 28

183. In reporting on an entity’s internal control over fi nancial reporting, a practitioner should include a paragraph that describes the a. Documentary evidence regarding the control environment factors. b. Changes in internal control since the prior report. c. Potential benefi ts from the practitioner’s suggested improvements. d. Inherent limitations of any internal control.

Answer 28

183. (d) The requirement is to identify the statement that should be included in a CPA’s report on a client’s internal control over fi nancial reporting. Answer (d) is correct because AT 501 requires that the report include a comment on the inherent limitations of any internal control.

Question 29

184. When an independent auditor reports on internal control based on criteria established by governmental agencies, the report should a. Not include the agency’s name in the report. b. Indicate matters covered by the study and whether the auditor’s study included tests of controls with the procedures covered by the study. c. Not express a conclusion based on the agency’s criteria. d. Assume responsibility for the comprehensiveness of the criteria established by the agency and include recommendations for corrective action.

Answer 29

184. (b) The requirement is to describe the contents of a report on the study of internal control that is based on criteria established by governmental agencies. Answer (b) is correct because the report should indicate matters covered by the consideration and whether the auditor’s consideration included tests of controls with the procedures covered by his/ her consideration. Additionally, the report should describe the objectives and limitations of internal control and the accountant’s evaluation thereof; state the accountant’s conclusion, based on the agency’s criteria; and describe the purpose of the report and state that it should not be used for any other purpose. Answer (a) is incorrect because the agency’s name should be included. Answer (c) is incorrect because a conclusion may be made relative to the agency’s criteria. Answer (d) is incorrect because the accountant should not assume responsibility for the comprehensiveness of the criteria.

Question 30

185. When an examination has been performed on the effectiveness of entity’s internal control over fi nancial reporting and a material weakness has been noted, the practitioner’s report should express an opinion on a. The assertion. b. The subject matter to which the assertion relates. c. Neither of the above. d. Both of the above.

Answer 30

185. (b) AT 501 states that when a deviation from the control criteria being reported upon exists (here a material weakness in internal control) the CPA should report directly upon the subject matter and not upon the assertion.

Question 31

186. Which of the following types of engagements is not permitted under the professional standards for reporting on an entity’s compliance? a. Agreed-upon procedures on compliance with the speci fi ed requirements of a law. b. Agreed-upon procedures on the effectiveness of in ternal control over compliance with a law. c. Review on compliance with specifi ed requirements of a law. d. Examination on compliance with specifi ed requirements of a law.

Answer 31

186. (c) The requirement is to identify the type of asso ciation not permitted under the compliance attestation stand ards. AT 601 does not allow the CPA to perform a review over compli ance.

Question 32

165. For purposes of an audit of internal control performed under Public Company Accounting Oversight Board standards, the “as of date” is ordinarily a. The fi rst day of the year. b. The last day of the fi scal period. c. The last day of the auditor’s fi eldwork. d. The average date for the entire fi scal period.

Answer 32

165. (b) The requirement is to identify the “as of date” for purposes of an audit of internal control performed under PCAOB standards. Answer (b) is correct because the “as of date” is the last day of the fi scal period; it is this date on which the auditor concludes as to the effectiveness of internal control. Answers (a) and (c) are incorrect because neither the fi rst day of the year nor the last day of the auditor’s fi eldwork is the appropriate date on which to evaluate internal control. Answer (d) is incorrect because the “as of date” is a particular date, not an average.

Question 33

166. Consider an issuer (public) company whose purchases are made through the Internet and by telephone. Which of the following is correct? a. These types of purchases represent control objectives for the audit of internal control. b. These purchases are the assertions related to the purchase class of transactions. c. These types of purchases represent two major classes of transactions within the purchases process. d. These two types of transactions represent routine transactions that must always be investigated in extreme detail.

Answer 33

166. (c) The requirement is to identify the correct statement concerning a company that makes purchases both through the Internet and by telephone. Answer (c) is correct because both types of purchases are a part of the purchases process and represent major classes of transactions, as per PCAOB requirements. Answer (a) is incorrect because the purchase types themselves are not control objectives for internal control (control objectives address issues such as the completeness of the recording of sales). Answer (b) is incorrect because purchases are not assertions. Answer (d) is incorrect because purchase transactions may or may not be investigated in extreme detail.

Question 34

167. For an issuer (public) company audit of internal control, walkthroughs provide the auditor with primary evidence to Evaluate the effectiveness of the design of controls Confi rm whether controls have been implemented a. Yes Yes b. Yes No c. No Yes d. No No

Answer 34

167. (a) The requirement is to identify the circumstance(s) in which walk-throughs provide the auditor with primary evidence. A walk-through involves literally tracing a transaction from its origination through the company’s information systems until it is refl ected in the fi nancial reports. Answer (a) is correct because a walk-through provides evidence to (1) confi rm the auditor’s understanding of the fl ow of transactions and the design of controls, (2) evaluate the effectiveness of the design of controls, and (3) to confi rm whether controls have been implemented. Answer (b) is incorrect because walk-throughs provide the auditors with primary evidence to confi rm whether controls have been implemented. Answer (c) is incorrect because walkthroughs provide primary evidence to evaluate the effectiveness of design in internal control. Answer (d) is incorrect both because walk-throughs provide primary evidence to (1) evaluate the effectiveness of the design of controls and (2) confi rm whether the controls have been implemented.

Question 35

168. Which is most likely to be a question asked of employee personnel during a walk-through in an audit of the internal control of an issuer (public) company? a. Have you ever been asked to override the process? b. Do you believe that you are underpaid? c. What do you do when you fi nd a fraudulent transaction? d. Who trained you for this job?

Answer 35

168. (a) The requirement is to identify the most likely question to be asked of employee personnel during a walkthrough. Answer (a) is correct because a question on whether an employee has ever been asked to override the process is included in the example questions to be asked by the auditor. Answer (b) is incorrect because auditors do not in general ask whether the employee believes he or she is underpaid. Answer (c) is incorrect because a direct question on fraudulent transactions like this, while possible, ordinarily is not suggested. Answer (d) is incorrect because the auditor will not usually ask who trained the person. Note that all four questions might be asked, but only one is among those recommended in Standard 5.

Question 36

``` 169. How large must the actual loss identifi ed by the auditor be for a control defi ciency to possibly be considered a material weakness? Immaterial Material a. Yes Yes b. Yes No c. No Yes d. No No ```

Answer 36

169. (a) The requirement is to identify how large the actual loss identifi ed must be for a control defi ciency to possibly be considered a material weakness. Answer (a) is correct because a material weakness is determined by whether there is more than a remote likelihood of a material loss occurring due to the control defi ciency; the actual loss identifi ed need not be material. Answer (b) is incorrect because it suggests that a material amount identifi ed will not be considered a material weakness. Answer (c) is incorrect because it states that when the identifi ed amount is immaterial it is never a material weakness. Answer (d) is incorrect because it suggests that when an immaterial or material actual loss is discovered, the situation would not be assessed as a possible material weakness.

Question 37

170. For purposes of an audit of internal control performed under Public Company Accounting Oversight Board requirements, an account is signifi cant if there is more than a a. Reasonably possible likelihood that it could contain immaterial or material misstatements. b. Reasonably possible likelihood that it could contain material misstatements. c. Remote likelihood that it could contain material misstatements. d. Remote likelihood that it could contain more than inconsequential misstatements

Answer 37

170. (c) The requirement is to identify the circumstance that makes an account signifi cant for purposes of a PCAOB audit of internal control. Answer (c) is correct because PCAOB requires only more than a remote likelihood of material misstatement. Answer (a) is incorrect because the standard requires only a remote likelihood and because it is limited to material misstatements. Answer (b) is incorrect because the standard requires more than a remote likelihood, not more than a reasonably possible likelihood. Answer (d) is incorrect because material misstatements are involved, not misstatements that are more than inconsequential.

Question 38

171. A control defi ciency that is more than a signifi cant defi ciency is most likely to result in what form of audit opinion relating to internal control? a. Adverse. b. Qualifi ed. c. Unqualifi ed. d. Unqualifi ed with explanatory language

Answer 38

171. (a) The requirement is to identify the appropriate report when a control defi ciency that is more than a signifi cant defi ciency is identifi ed. Answer (a) is correct because a control defi ciency that is more than a signifi cant defi ciency is a material weakness, and because a material weakness leads to an adverse opinion on internal control. Answer (b) is incorrect because qualifi ed opinions are not issued when a material weakness exists. Answer (c) is incorrect because an unqualifi ed opinion is not issued when a material weakness exists. Answer (d) is incorrect because explanatory language added to an unqualifi ed report is not appropriate when a material weakness exists.

Question 39

172. Which of the following is most likely to be considered a material weakness in internal control for purposes of an internal control audit of an issuer (public) company? a. An ineffective oversight of fi nancial reporting by the audit committee. b. Restatement of previously issued fi nancial statements due to a change in accounting principles. c. Inadequate segregation of recordkeeping from accounting. d. Weaknesses in control activities.

Answer 39

172. (a) The requirement is to identify the defi ciency that is most likely to be considered a material weakness in internal control for purposes of an internal control audit of a public company. Answer (a) is correct because ineffective oversight of fi nancial reporting by the audit committee is among the list of circumstances that the PCAOB suggests are strong indicators of the existence of a material weakness. Restatement of previously issued fi nancial statements as a result of a change in accounting principles is ordinarily not considered even a signifi cant defi ciency. Answer (c) is incorrect because the reply “inadequate segregation of recordkeeping from accounting” makes no real sense because accounting is involved with recordkeeping. Answer (d) is incorrect because control activity weaknesses often do not represent material weaknesses.

Question 40

173. Inability to evaluate internal control due to a circumstance-caused scope limitation relating to a signifi cant account in a Sarbanes-Oxley 404 internal control audit is most likely to result in a(n) a. Adverse opinion. b. Qualifi ed opinion. c. Unqualifi ed opinion with explanatory language. d. All of the above are equally likely

Answer 40

173. (b) The requirement is to identify the most appropriate report when a circumstance-caused scope limitation results in inability to evaluate internal control for a signifi cant account involved in the audit. Answer (b) is correct because the PCAOB requires that either a qualifi ed opinion or a disclaimer is appropriate, and because the disclaimer is not listed as an option. Answer (a) is incorrect because an adverse opinion is not appropriate. Answer (c) is incorrect because an unqualifi ed opinion with explanatory language is not appropriate when the auditor is unable to evaluate internal control for a signifi cant account. Answer (d) is incorrect because answers (a) and (c) are not appropriate.

Question 41

174. Which of the following is most likely to indicate a signifi cant defi ciency relating to a client’s antifraud programs? a. A broad scope of internal audit activities. b. A “whistle-blower” program that encourages anonymous submissions. c. Audit committee passivity when conducting oversight functions. d. Lack of performance of criminal background investigations for likely customers.

Answer 41

174. (c) The requirement is to identify the most likely signifi cant defi ciency relating to a client’s antifraud programs. Answer (c) is correct because an active audit committee, not a passive audit committee is needed. Answer (a) is incorrect because a broad scope of internal audit activities is ordinarily a strength, not a defi ciency. Answer (b) is incorrect because a whistle-blower program that encourages anonymous submissions is required. Answer (d) is incorrect because it is not ordinarily necessary to perform criminal background investigations for likely customers.

Question 42

175. An auditor identifi ed a material weakness in December. The client was informed and corrected it shortly after the “as of date” (December 31); the auditor agrees that the correction eliminates the material weakness as of January 31. The appropriate report under a PCAOB audit of internal control is a. Adverse. b. Unqualifi ed. c. Unqualifi ed with explanatory language relating to the material weakness. d. Qualifi ed.

Answer 42

175. (a) The requirement is to identify the appropriate audit report when a material weakness is corrected subsequent to year-end, but before the audit report is issued. Answer (a) is correct because the PCAOB requires an adverse audit report when a material weakness exists at year-end, the “as of date.” Answer (b) is incorrect because an unqualifi ed opinion is not appropriate. Answer (c) is incorrect because an unqualifi ed opinion with explanatory language is not adequate. Answer (d) is incorrect because a qualifi ed opinion is not appropriate when a material weakness exists at year-end.

Question 43

``` 176. In an integrated audit, which of the following lead(s) to an adverse opinion on internal control? Material weaknesses Signifi cant defi ciencies a. Yes Yes b. Yes No c. No Yes d. No No ```

Answer 43

176. (b) The requirement is to specify whether material weaknesses and/or signifi cant defi ciencies lead to an adverse opinion on internal control in an integrated audit. Answer (b) is correct because only material weaknesses lead to an adverse opinion. Answer (a) is incorrect because signifi cant defi ciencies do not result in an adverse opinion. Answer (c) is incorrect because material weaknesses do result in adverse opinions but signifi cant defi ciencies do not. Answer (d) is incorrect because material weaknesses do result in adverse opinions.

Question 44

153. Which of the following best describes a CPA’s engagement to report on an entity’s internal control over fi nancial reporting? a. An engagement to form an opinion on the effectiveness of its internal control. b. An audit engagement to provide negative assurance on the entity’s internal control. c. A prospective engagement to project, for a period of time not to exceed one year, and report on the expected benefi ts of the entity’s internal control. d. A consulting engagement to provide constructive advice to the entity on its internal control.

Answer 44

153. (a) The requirement is to identify the statement that best describes a CPA’s engagement to report on an entity’s internal control over fi nancial reporting. Answer (a) is correct because the objective of such engagement is to form an opinion on the effectiveness of internal control. Answer (b) is incorrect because no such negative assurance is provided based on an “audit” of the entity’s internal control. Answer (c) is incorrect because such engagements do not project expected benefi ts of the entity’s internal control. Answer (d) is incorrect because such engagements are attestation engagements, not consulting engagements.

Question 45

154. An engagement to examine internal control will generally a. Require procedures that duplicate those already applied in assessing control risk during a fi nancial statement audit. b. Increase the reliability of the fi nancial statements that have already been audited. c. Be more extensive in scope than the assessment of control risk made during a fi nancial statement audit. d. Be more limited in scope than the assessment of control risk made during a fi nancial statement audit.

Answer 45

154. (c) The requirement is to determine the correct statement regarding an engagement to examine internal control. Answer (c) is correct because the procedures relating to internal control will be more extensive when reporting on internal control as compared to procedures performed for a fi nancial statement audit. This difference occurs because during fi nancial statement audits the auditor may decide not to perform tests of controls and may simply assess control risk at the maximum level. Conversely, in an engagement to report on internal control an auditor must perform additional tests of controls. Answer (a) is incorrect because such duplication of procedures may not be necessary. Answer (b) is incorrect because a report on internal control will not in general increase the reliability of the fi nancial statements. Answer (d) is incorrect because, as indicated, the scope of procedures relating to internal control is more extensive, not more limited, than the assessment of control risk made during a fi nancial statement audit.

Question 46

155. Which of the following is correct concerning the level of assistance auditors may provide in assisting management with its assessment of internal control? a. No assistance of any type may be provided. b. No limitations on assistance exist. c. Only very limited assistance may be provided. d. As less risk is assumed by the auditors, a higher level of assistance is appropriate

Answer 46

155. (c) The requirement is to identify the correct statement concerning the level of assistance that auditors may provide in assisting management with its assessment of internal control. Answer (c) is correct since only limited assistance may be provided so as not to create a situation in which the auditors are auditing their own work. Answer (a) is incorrect since some assistance may be provided. Answer (b) is incorrect because there are limitations on the level of assistance. Answer (d) is incorrect because the tie between risk and assistance seems inappropriate and in the wrong direction; also, this type of tradeoff between risk and assistance is not included in PCAOB auditing standards.

Question 47

156. Which of the following need not be included in management’s report on internal control under Section 404a of the Sarbanes-Oxley Act of 2002? a. A statement that the company’s auditor has issued an attestation report on management’s assertion. b. Identifi cation of the framework for evaluating internal control. c. Management’s assessment of the effectiveness of internal control. d. Management’s statement of responsibility to establish and maintain internal control that has no signifi cant defi ciencies

Answer 47

156. (d) The requirement is to identify which of the following need not be included in management’s report on internal control under Section 404a of the Sarbanes-Oxley Act of 2002. Answer (d) is correct because, while the report must indicate that it is management’s responsibility to establish and maintain adequate internal control, it need not also indicate that such control has no signifi cant defi ciencies. Answers (a), (b), and (c) are all incorrect because they include information that must be contained in management’s report.

Question 48

157. Which of the following is an accurate statement about internal control weaknesses? a. Material weaknesses are also control defi ciencies. b. Signifi cant defi ciencies are also material weaknesses. c. Control defi ciencies are also material weaknesses. d. All control defi ciencies must be communicated to the audit committee.

Answer 48

157. (a) Answer (a) is correct because all material weaknesses are control defi ciencies. Answer (b) is incorrect because a signifi cant defi ciency may or may not be a material weakness. Answer (c) is incorrect because not all control defi ciencies are material weaknesses. Answer (d) is incorrect because only signifi cant defi ciencies and material weaknesses must be communicated.

Question 49

163. How do the scope, procedures, and purpose of an examination of internal control compare to those for obtaining an understanding of internal control and assessing control risk as part of an audit? Scope Procedures Purpose a. Similar Different Similar b. Different Similar Similar c. Different Different Different d. Different Similar Different

Answer 49

163. (d) The requirement is to identify the relationship between an examination of internal control and obtaining an understanding of internal control and assessing control risk as part of an audit. Answer (d) is correct because, while the scope and purpose differ between the two types of engagements, the procedures followed are similar.

Question 50

164. A procedure that involves tracing a transaction from its origination through the company’s information systems until it is refl ected in the company’s fi nancial report is referred to as a(n) a. Analytical analysis. b. Substantive procedure. c. Test of a control d. Walk-through.

Answer 50

164. (d) The requirement is to identify the procedure that involves tracing a transaction from origination through the company’s information systems until it is refl ected in the company’s fi nancial report. Answer (d) is correct because this is the approach followed in a walk-through. Answer (a) is incorrect because analytical analysis is a general term that simply suggests a general analysis. Answer (b) is incorrect because a substantive procedure addresses the correctness of a particular fi nancial statement amount or disclosure. Answer (c) is incorrect because a test of a control addresses the operating effectiveness of a control.

Question 51

1. The existence of audit risk is recognized by the state ment in the auditor’s standard report that the auditor a. Obtains reasonable assurance about whether the fi nancial statements are free of material misstate ment. b. Assesses the accounting principles used and also evalu ates the overall fi nancial statement presenta tion. c. Realizes some matters, either individually or in the ag gregate, are important while other-matters are not im portant. d. Is responsible for expressing an opinion on the fi nancial statements, which are the responsibility of man agement

Answer 51

1. (a) The requirement is to identify the statement in the standard audit report that indicates the existence of audit risk. Answer (a) is correct because the existence of audit risk is recog nized by the statement in the auditor’s standard report that the auditor obtained “reasonable assurance.” Answer (b) is incorrect because while the standard report does indicate that the CPA assesses the accounting prin ci ples used and the overall fi nancial statement presentation, this does not indicate the existence of audit risk. Answer (c) is incorrect because while the standard report does indicate that the audit relates to whether the fi nancial statements are free of material misstatement, it does not discuss materiality and the audit risk associated with materiality. An swer (d) is incorrect because while the fi nancial statements are the re sponsibility of management and the CPA’s responsibility is to express an opinion, the indication that the CPA expresses an opinion does not address audit risk and is less precise than the statement that the auditor obtains reasonable assur ance.

Question 52

2. When an accountant performs more than one level of ser vice (for example, a compilation and a review, or a compilation and an audit) concerning the fi nancial statements of a nonissuer (nonpublic) entity, the accountant generally should issue the report that is appropriate for a. The lowest level of service rendered. b. The highest level of service rendered. c. A compilation engagement. d. A review engagement.

Answer 52

2. (b) The requirement is to determine an accountant’s reporting responsibility when more than one level of service con cerning the fi nancial statements of a nonissuer (nonpub lic) entity has been performed. Answer (b) is correct be cause the profes sional standards that the accountant report on the highest level of service rendered. Answer (a) is incorrect because the highest, and not the lowest, level is reported on. Answer (c) is incorrect because regardless of the other type of service performed, the compilation level is always the lowest level and therefore should not be the basis of the re port. Answer (d) is incorrect because in circumstances in which an audit has been performed, an audit report, not a review report, is appropriate

Question 53

3. March, CPA, is engaged by Monday Corp., a client, to audit the fi nancial statements of Wall Corp., a company that is not March’s client. Monday expects to present Wall’s audited fi nan cial statements with March’s auditor’s report to 1st Federal Bank to obtain fi nancing in Monday’s attempt to purchase Wall. In these circumstances, March’s auditor’s report would usually be addressed to a. Monday Corp., the client that engaged March. b. Wall Corp., the entity audited by March. c. 1st Federal Bank. d. Both Monday Corp. and 1st Federal Bank.

Answer 53

3. (a) The requirement is to determine the proper ad dressee of a report in a circumstance in which one company has hired a CPA to audit another company’s fi nancial state ments. Answer (a) is correct because while audit reports are ordinarily addressed to the company whose fi nancial state ments are being audited, when a CPA audits the fi nancial statements of a company that is not his or her client (as is the case here) the report is addressed to the company that hired the CPA.

Question 54

4. Which of the following statements is a basic element of the auditor’s standard report on fi nancial statements? a. The disclosures provide reasonable assurance that the fi nancial statements are free of material mis statement. b. The auditor evaluated the overall internal control and provides limited assurance on it. c. An audit includes assessing signifi cant estimates made by management. d. The fi nancial statements are consistent with those of the prior period.

Answer 54

4. (c) The requirement is to identify the statement that is included in the auditor’s standard report. Answer (c) is correct because the auditor’s standard report states that an audit includes assessing signifi cant estimates made by man agement; the other replies provide information not directly mentioned in a standard report.

Question 55

5. For a nonpublic company, which section (paragraph) of the audit report includes a statement that the auditor believes that the audit evidence obtained is suffi cient? a. Introductory. b. Opinion. c. Auditor’s responsibility. d. Management’s responsibility

Answer 55

5. (c) The requirement is to identify which section of the audit report the auditor speaks of the adequacy of audit evi dence. Answer (a) is correct because in the auditor’s responsibility sec tion the auditors states a belief that the audit evidence obtained is suffi cient and appropriate to provide a basis for the audit opinion.

Question 56

6. For a nonpublic company audit report, a statement that the auditor has audited the fi nancial statements followed by the titles of the fi nancial statements is included in the a. Management’s responsibility section of the audit re port. b. The opening paragraph of the auditor’s standard re port. c. The auditor’s responsibility section of the audit re port. d. The opinion paragraph of the auditor’s standard report.

Answer 56

6. (b) The requirement is to identify the correct state ment concerning where a statement that the auditor has au dited the fi nancial statements which are then listed is in cluded in the audit report. Answer (b) is correct because the opening (introduc tory) paragraph of the audi tor’s standard report states that the auditor has audited the fi nancial statements and then lists them. Answer (a) is incorrect be cause of the explicit statement in the introductory paragraph. Answers (c) and (d) are incorrect be cause the introductory paragraph, not the auditor’s responsibility section or the opinion paragraph, includes the statement and lists the fi nan cial statements

Question 57

``` 7. How does an auditor make the following representa tions when issuing the standard public company auditor’s report on compar ative fi nancial statements? Examination of evidence on a test basis Consistent application of accounting principles a. Explicitly Explicitly b. Implicitly Implicitly c. Implicitly Explicitly d. Explicitly Implicitly ```

Answer 57

7. (d) The requirement is to determine the representa tions made explicitly and implicitly when issuing a public company standard auditor’s report on comparative fi nancial statements. Answer (d) is correct because that audit report ex plicitly states that the examination of evidence is made on a test basis and im plicitly assumes consistent application of accounting principles. Answer (a) is incorrect because con sistency of application of accounting principles is not indi cated explicitly. Answer (b) is incorrect because examina tion of evidence on a test basis is re ferred to explicitly. Answer (c) is incorrect because examination of evidence on a test basis is explicitly referred to and because consistent application of accounting principles is not explicitly referred to

Question 58

8. Which of the following best describes the reference to the expression “taken as a whole” in the PCAOB’s audit reporting standards? a. They apply equally to a complete set of fi nancial statements and to each individual fi nancial state ment. b. They apply only to a complete set of fi nancial state ments. c. They apply equally to each item in each fi nancial state ment. d. They apply equally to each material item in each fi - nan cial statement.

Answer 58

8. (a) The requirement is to determine the meaning of the expression “taken as a whole” in the fourth generally accepted auditing standard of reporting. The professional standards state that “taken as a whole” applies equally to a complete set of fi - nancial statements and to an individual fi nancial statement.

Question 59

9. A fi nancial statement audit report issued for the audit of an issuer (public) company concludes that the fi nancial statements follow a. Generally accepted accounting principles. b. Public Company Accounting Oversight Board stan d ards. c. Generally accepted auditing standards. d. International accounting standards.

Answer 59

9. (a) The requirement is to determine the accounting principles that an issuer (public) company audit report refers to. Answer (a) is correct because the fi nancial statements follow generally accepted accounting principles. Answer (b) is incorrect because, while the audit is performed in accordance with PCAOB standards, the fi nancial statements do not follow those standards. Answer (c) is incorrect because the fi nancial statements do not follow generally accepted auditing standards. Answer (d) is in correct because the fi nancial statements ordinarily follow gener ally accepted ac counting principles, not International Accounting Standards.

Question 60

10. Which of the following is not correct concerning information included in an audit report of fi nancial statements issued under the requirements of the Public Company Ac counting Oversight Board? a. The report should include the title “Report of Independ ent Registered Public Accounting Firm.” b. The report should refer to the standards of the PCAOB. c. The report should include a paragraph referring to the auditor’s report on compliance with laws and regula tions. d. The report should contain the city and state or coun try of the offi ce that issued the report

Answer 60

10. (c) The requirement is to identify the incorrect statement concerning information included in an audit report of fi nancial statements issued under the requirements of the PCAOB. Answer (c) is correct since the report should refer to the auditor’s report on internal control, not on compliance with laws and reg ulations. Answer (a) is incorrect because the report should in clude the title “Report of Independent Registered Public Ac counting Firm.” Answer (b) is incor rect because the report should refer to the standards of the PCAOB. Answer (d) is in correct because the report should contain the city and state or country of the offi ce that issued the report

Question 61

11. An auditor concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. If the entity’s fi nancial state ments adequately disclose its fi nancial diffi culties, the audi tor’s report is required to include an emphasis-of-matter par agraph that specifi cally uses the phrase(s) “Reasonable period of time, not to exceed 1 year” “Going concern” a. Yes Yes b. Yes No c. No Yes d. No No

Answer 61

11. (c) The requirement is to determine whether the term “reasonable period of time, not to exceed one year” and/ or “go ing concern” is included in an emphasis-of-matter paragraph relating to going concern status. Answer (c) is correct because while the term “going concern” must be included, the fi rst term is not included in such a report

Question 62

12. Mead, CPA, had substantial doubt about Tech Co.’s ability to continue as a going concern when reporting on Tech’s audited fi nancial statements for the year ended June 30, 20X1. That doubt has been removed in 20X2. What is Mead’s reporting re sponsibility if Tech is presenting its fi nancial statements for the year ended June 30, 20X2, on a comparative basis with those of 20X1? a. The emphasis-of-matter paragraph included in the 20X1 au ditor’s report should not be repeated. b. The emphasis-of-matter paragraph included in the 20X1 au ditor’s report should be repeated in its en tirety. c. A different emphasis-of-matter paragraph describ ing Mead’s reasons for the removal of doubt should be included. d. A different emphasis-of-matter paragraph describ ing Tech’s plans for fi nancial recovery should be in cluded.

Answer 62

12. (a) The requirement is to determine an auditor’s report ing responsibility when reporting on comparative fi nancial statements in which the fi rst year presented originally received a going concern modifi cation on a matter that has now been re solved, thus removing the auditor’s substan tial doubt. Answer (a) is correct because if substantial doubt has been removed in the current period, the emphasis-of-matter paragraph included in the auditor’s report on the fi nancial statements of the prior period should not be repeated. An swers (b), (c), and (d) are all incorrect because the paragraph should not be repeated given the changed circumstances.

Question 63

13. When an auditor concludes there is substantial doubt about a continuing audit client’s ability to continue as a going concern for a reasonable period of time, the auditor’s responsibility is to a. Issue a qualifi ed or adverse opinion, depending upon ma teriality, due to the possible effects on the fi nancial statements. b. Consider the adequacy of disclosure about the cli ent’s possible inability to continue as a going con cern. c. Report to the client’s audit committee that manage ment’s accounting estimates may need to be ad justed. d. Reissue the prior year’s auditor’s report and add an em phasis-of-matter paragraph that specifi cally re fers to “substantial doubt” and “going concern.”

Answer 63

13. (b) The requirement is to determine the auditor’s responsibility when s/he concludes that there is substantial doubt about an entity’s ability to continue as a going concern for a reasonable period of time. Answer (b) is correct be cause when the auditor concludes there is substantial doubt, s/he should consider the possible effects on the fi nancial statements, and the adequacy of the related disclosures. Answer (a) is incorrect be cause either an unmodifi ed opin ion with an emphasis-ofmatter paragraph or a disclaimer is generally appropriate, not a qualifi ed or adverse opinion. Answer (c) is incorrect because the substan tial doubt of go ing concern status does not require adjusting accounting estimates. An swer (d) is incorrect because the prior year’s audit report need not be reissued with an emphasis-of-matter paragraph.

Question 64

14. Green, CPA, concludes that there is substantial doubt about JKL Co.’s ability to continue as a going concern. If JKL’s fi nan cial statements adequately disclose its fi nancial diffi culties, Green’s auditor’s report should Include an emphasis-ofmatter paragraph following the opinion paragraph Specifi cally use the words “going concern” Specifi cally use the words “substantial doubt” a. Yes Yes Yes b. Yes Yes No c. Yes No Yes d. No Yes Yes

Answer 64

14. (a) The requirement is to determine an auditor’s reporting responsibility when there is substantial doubt about a client’s ability to continue as a going concern. An swer (a) is correct because the audit report must include an emphasis-ofmatter paragraph following the opinion para graph, and must use the terms “going concern” and “sub stantial doubt.”

Question 65

15. In which of the following circumstances would an audi tor most likely add an emphasis-of-matter paragraph to the audit report while not affecting the auditor’s unmodifi ed opinion? a. The auditor is asked to report on the balance sheet, but not on the other basic fi nancial statements. b. There is substantial doubt about the entity’s ability to continue as a going concern. c. Management’s estimates of the effects of future events are unreasonable. d. Certain transactions cannot be tested because of management’s records retention policy.

Answer 65

15. (b) The requirement is to identify the situation in which an emphasis-of-matter paragraph may be added to an unmodifi ed report. Answer (b) is correct because substantial doubt about the entity’s ability to continue as a going concern leads to either an unmodifi ed report with an emphasisof- matter paragraph or a disclaimer of opinion. Answer (a) is incor rect because an auditor may issue an opinion on a balance sheet without reporting on the other basic fi nancial state ments. Answer (c) is incorrect because unreasonable esti mates lead to either a qualifi ed or an adverse opinion. An swer (d) is incorrect because inadequate manage ment record retention policies are a scope limitation that may re sult in a qualifi ed opinion or a disclaimer.

Question 66

16. After considering an entity’s negative trends and fi nan cial diffi culties, an auditor has substantial doubt about the entity’s ability to continue as a going concern. The auditor’s considerations relating to management’s plans for dealing with the adverse effects of these conditions most likely would include manage ment’s plans to a. Increase current dividend distributions. b. Reduce existing lines of credit. c. Increase ownership equity. d. Purchase assets formerly leased.

Answer 66

16. (c) The requirement is to identify the management plan an auditor would most likely positively consider when a question concerning an entity’s ability to continue as a going concern ex ists. Answer (c) is correct because increasing the ownership equity will bring in funds to possibly overcome the negative trends and fi nancial diffi culties. Answers (a), (b), and (d) are all incorrect because increasing dividend distributions, reducing lines of credit, and purchasing assets will all use funds, they will not provide funds. See AU-C 570 for guidance on an auditor’s consideration of an entity’s ability to continue as a going concern

Question 67

17. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern? a. Signifi cant related-party transactions are pervasive. b. Usual trade credit from suppliers is denied. c. Arrearages in preferred stock dividends are paid. d. Restrictions on the disposal of principal assets are present.

Answer 67

17. (b) The requirement is to identify the condition or event most likely to cause an auditor to have substantial doubt about an entity’s ability to continue as a going con cern. Answer (b) is correct because denial of usual trade from suppliers is ordinarily an indicator that the company is in weak fi nancial condition. Answer (a) is incorrect because while such related-party transactions may be considered risky, there is less likely to be a question concerning going concern status than suggested by answer (a). Answer (c) is incorrect because the payment of such stock dividends does not indicate fi nancial weakness. Answer (d) is incorrect because restrictions on the disposal of principal assets is a condition often present in various loan agreements.

Question 68

18. Cooper, CPA, believes there is substantial doubt about the ability of Zero Corp. to continue as a going concern for a reason able period of time. In evaluating Zero’s plans for dealing with the adverse effects of future conditions and events, Cooper most likely would consider, as a mitigating factor, Zero’s plans to a. Discuss with lenders the terms of all debt and loan agreements. b. Strengthen controls over cash disbursements. c. Purchase production facilities currently being leased from a related party. d. Postpone expenditures for research and develop ment projects.

Answer 68

18. (d) The requirement is to identify the most likely miti gating factor a CPA would consider when a client’s ability to continue as a going concern is in question. Answer (d) is correct because the ability to postpone expenditures for research and development projects may mitigate the circumstance. An swer (a) is incorrect because there is no guaran tee that Zero’s discussions with its lenders will lead to a restructuring of the debt and loan agreements. Only existing or committee agreements to restructure the debt would be considered a mitigating factor. Answer (b) is incorrect because

Question 69

19. Which of the following conditions or events most likely would cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern? a. Cash fl ows from operating activities are negative. b. Research and development projects are postponed. c. Signifi cant related-party transactions are pervasive. d. Stock dividends replace annual cash dividends.

Answer 69

19. (a) The requirement is to identify the condition or event that is most likely to cause an auditor to have substantial doubt about an entity’s ability to continue as a going concern. Answer (a) is correct because the professional standards (as well as logic) includes negative cash fl ows as one of its examples of such condi tions and events. An swer (b) is incorrect because while the postponement of research and development projects may sometimes be due to extreme fi nancial diffi culties, often it is not. Answers (c) and (d) are incorrect because neither sig nifi cant related-party transactions nor stock dividends need not indicate substan tial doubt about an entity’s ability to continue as a going concern. See AU-C 570 for information on an auditor’s con sideration of an entity’s ability to continue as a going con cern.

Question 70

20. Which of the following auditing procedures most likely would assist an auditor in identifying conditions and events that may indicate substantial doubt about an entity’s ability to con tinue as a going concern? a. Inspecting title documents to verify whether any assets are pledged as collateral. b. Confi rming with third parties the details of ar rangements to maintain fi nancial support. c. Reconciling the cash balance per books with the cu toff bank statement and the bank confi rmation. d. Comparing the entity’s depreciation and asset cap italization policies to other entities in the industry

Answer 70

20. (b) The requirement is to identify the condition or event that might indicate to an auditor substantial doubt about an entity’s ability to continue as a going concern. Answer (b) is correct because confi rmation with related and third parties of the details of arrangements to provide or maintain fi nancial support is a procedure that would assist an auditor in identifying a ques tion concerning going con cern status. See AU-C 570 for this and other such conditions and events indicating doubt about an en tity’s ability to con tinue as a going concern. Answer (a) is incor rect because the pledging of assets as collateral is a normal busi ness transaction and it need not necessarily indicate a question of going concern status. Answer (c) is incorrect because rec onciling the cash balances with the cutoff bank statement is an acceptable audit procedure, but will not normally identify a going concern question. Answer (d) is incorrect because comparing an entity’s depreciation and asset capitalization policies will not normally indicate a question of going con cern status.

Question 71

21. Which of the following audit procedures would most likely assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity’s ability to continue as a going concern? a. Review compliance with the terms of debt agree ments. b. Confi rmation of accounts receivable from principal cus tomers. c. Reconciliation of interest expense with debt out stand ing. d. Confi rmation of bank balances.

Answer 71

21. (a) The requirement is to identify the audit proce dure most likely to assist an auditor in identifying conditions and events that may indicate there could be substantial doubt about an entity’s ability to continue as a going concern. Answer (a) is correct because a review of compliance with terms of debt and loan agreements may reveal conditions of noncompliance due to poor fi nancial condition. See the outline of AU-C 570 for a list of procedures that may identify such conditions and events. Answers (b), (c), and (d) are all incorrect because, while they might in some circumstances reveal a question concerning the company’s ability to con tinue as a going concern, they are not considered to be as effective as answer (a).

Question 72

22. Davis, CPA, believes there is substantial doubt about the ability of Hill Co. to continue as a going concern for a reasonable period of time. In evaluating Hill’s plans for dealing with the adverse effects of future conditions and events, Davis most likely would consider, as a mitigating factor, Hill’s plans to a. Accelerate research and development projects re lated to future products. b. Accumulate treasury stock at prices favorable to Hill’s historic price range. c. Purchase equipment and production facilities cur rently being leased. d. Negotiate reductions in required dividends being paid on preferred stock.

Answer 72

22. (d) The requirement is to identify the factor which a CPA would most likely consider as mitigating substantial doubt about the ability of an entity to continue as a going concern. Answer (d) is correct because management’s abil ity to negotiate reductions of required dividends will de crease required cash outfl ows, and thereby increase the like lihood that the entity will be able to continue as a going con cern. AU-C 570 provides ex amples of information that might mitigate such concern. An swers (a), (b), and (c) are all in correct because they involve spending cash, rather than re ducing outfl ows of cash.

Question 73

23. The adverse effects of events causing an auditor to be lieve there is substantial doubt about an entity’s ability to continue as a going concern would most likely be mitigated by evidence relat ing to the a. Ability to expand operations into new product lines in the future. b. Feasibility of plans to purchase leased equipment at less than market value. c. Marketability of assets that management plans to sell. d. Committed arrangements to convert preferred stock to long-term debt.

Answer 73

23. (c) The requirement is to identify the circumstance most likely to mitigate an auditor’s substantial doubt about an entity’s ability to continue as a going concern. An swer (c) is correct because the marketable assets that man agement intends to sell may potentially provide the neces sary fi nancial resources to mitigate the substantial doubt about the entity’s ability to con tinue as a going concern. Answer (a) is incorrect because the ability to expand opera tions into new product lines is a suspect circumstance, given the substantial doubt about the entity’s abil ity to continue as a going concern. Answer (b) is incorrect be cause it also requires cash resources which may not be available. An swer (d) is incorrect because converting preferred stock to long-term debt will not generally alleviate a question con cerning an entity’s ability to continue as a going concern.

Question 74

24. For which of the following events would an auditor issue a report that omits any reference to consistency? a. A change in the method of accounting for invento ries. b. A change from an accounting principle that is not gen erally accepted to one that is generally ac cepted. c. A change in the useful life used to calculate the pro vision for depreciation expense. d. Management’s lack of reasonable justifi cation for a change in accounting principle.

Answer 74

24. (c) The requirement is to identify the circumstances in which an auditor would issue a report that omits any ref erence to consistency. Answer (c) is correct because a change in the useful life of assets is a change in estimate, and a change in estimate does not result in a consistency modifi cation. Answers (a) and (b) are in correct because they both represent a change in accounting principle, and a change in accounting principle requires a con sistency modi fi cation. Answer (d) is incorrect because manage ment’s lack of reasonable justifi cation for a change in accounting principle is a departure from generally ac cepted accounting prin ciples, and the description of the de parture will discuss the inconsistency.

Question 75

``` 25. An auditor would express an unmodifi ed opinion and add an emphasis-of-matter paragraph for An unjustifi ed accounting change A material weakness in the internal control a. Yes Yes b. Yes No c. No Yes d. No No ```

Answer 75

25. (d) The requirement is to determine whether an unjustifi ed accounting change, a material weakness in internal con trol, or both, would cause an auditor to express an unmodifi ed opinion with an emphasis-of-matter paragraph. Answer (d) is correct because an unjustifi ed accounting change will result in either a qualifi ed or an adverse opinion and a material weakness will ordinarily result in no report modifi ca tion (see AU-C 265 for information on the treatment of ma terial weaknesses); accord ingly, an unmodifi ed opin ion with an emphasis-of-matter para graph added to the au ditor’s report is not appropriate in either case.

Question 76

26. Under which of the following circumstances would a disclaimer of opinion not be appropriate? a. The auditor is unable to determine the amounts as so ciated with an employee fraud scheme. b. Management does not provide reasonable justifi ca tion for a change in accounting principles. c. The client refuses to permit the auditor to confi rm cer tain accounts receivable or apply alternative procedures to verify their balances. d. The chief executive offi cer is unwilling to sign the man agement representation letter.

Answer 76

26. (b) The requirement is to identify the circumstance in which a disclaimer of opinion is not appropriate. An swer (b) is correct because when management does not pro vide reasonable justifi cation of a change in accounting prin ciples either a qualifi ed or an adverse opinion is appropriate, not a disclaimer. An swers (a), (c), and (d) are all incorrect because they represent scope limitations that lead to either a qualifi ed opinion or a dis claimer of opinion.

Question 77

27. Digit Co. uses the FIFO method of costing for its in terna tional subsidiary’s inventory and LIFO for its domestic inventory. Under these circumstances, the auditor’s report on Digit’s fi nan cial statements should express an a. Unmodifi ed opinion. b. Opinion qualifi ed because of a lack of consistency. c. Opinion qualifi ed because of a departure from GAAP. d. Adverse opinion.

Answer 77

27. (a) The requirement is to determine the effect on an audit report of a client’s decision to use differing inventory cost ing methods for various portions of its inventory. An swer (a) is correct because a standard unmodifi ed opinion may ordinarily be issued (see AU-C 708 for a discussion of the consistency stan dard). Answer (b) is incorrect because there is no lack of con sistency between accounting periods. An swer (c) is incorrect because there is no departure from GAAP. Answer (d) is incor rect because adverse opinions are only issued when a departure from GAAP exists that makes the fi nancial statements mislead ing.

Question 78

28. In the fi rst audit of a new client, an auditor was able to ex tend auditing procedures to gather suffi cient evidence about consistency. Under these circumstances, the auditor should a. Not report on the client’s income statement. b. Not refer to consistency in the auditor’s report. c. State that the consistency standard does not apply. d. State that the accounting principles have been ap plied consistently.

Answer 78

28. (b) The requirement is to identify an auditor’s report ing responsibility when performing a fi rst audit of a new client and when the auditor was able to extend auditing procedures to gather suffi cient evidence about consistency. Answer (b) is correct because, when the auditor has obtained assurance as to the consistency of application of accounting principles between the current and preceding year, no men tion of consistency is in cluded in the audit report. An swer (a) is incorrect because the auditor may report on the client’s income statement. Answer (c) is incorrect because the consistency standard does apply. An swer (d) is incorrect because the auditor does not refer to con sistency when ac counting principles have been applied consist ently.

Question 79

29. When management does not provide reasonable justifi - cation that a change in accounting principle is preferable and it presents comparative fi nancial statements, the auditor should express a qualifi ed opinion a. Only in the year of the accounting principle change. b. Each year that the fi nancial statements initially re fl ecting the change are presented. c. Each year until management changes back to the accounting principle formerly used. d. Only if the change is to an accounting principle that is not generally accepted

Answer 79

29. (b) The requirement is to determine auditor reporting responsibility when management does not provide reasonable justifi cation for a change in accounting principle and presents comparative fi nancial statements. Answer (b) is correct because the auditor should continue to express his/her exception with the fi nancial statements for the year of change as long as they are presented and reported on. Answer (a) is incorrect because the auditor must express his/her exception for as long as the fi nancial statements for the year of change are presented and reported on. An swer (c) is incorrect because the auditor need not qualify the report until management changes back to the accounting princi ple formerly used. Answer (d) is incorrect because the qualifi ca tion is necessary despite the fact that the principle is generally accepted.

Question 80

30. When an entity changes its method of accounting for income taxes, which has a material effect on comparability, the auditor should refer to the change in an emphasis-of-matter para graph added to the auditor’s report. This para graph should iden tify the nature of the change and a. Explain why the change is justifi ed under generally ac cepted accounting principles. b. Describe the cumulative effect of the change on the au dited fi nancial statements. c. State the auditor’s explicit concurrence with or op posi tion to the change. d. Refer to the fi nancial statement note that discusses the change in detail.

Answer 80

30. (d) The requirement is to determine the information that must be presented when a client has changed accounting principles. Answer (d) is correct because in addition to identifying the nature of the change, the auditor must refer to the fi nancial statement note that discusses the change in de tail. An swer (a) is incorrect because while the auditor must believe that the change is justifi ed, it is not necessary to ex plain it in the re port. Answer (b) is incorrect because the cumulative effect of the change need not be described in the audit report. Answer (c) is incorrect because the auditor need not make explicit concurrence with the change.

Question 81

31. An entity changed from the straight-line method to the declining balance method of depreciation for all newly acquired assets. This change has no material effect on the current year’s fi nancial statements, but is reasonably certain to have a substan tial effect in later years. If the change is disclosed in the notes to the fi nancial statements, the auditor should issue a report with a(n) a. “Except for” qualifi ed opinion. b. Emphasis-of-matter paragraph. c. Unmodifi ed opinion. d. Consistency modifi cation

Answer 81

31. (c) The requirement is to determine the proper re port ing option for a change in accounting principles with an immate rial current year effect, but which is expected to have a substantial effect in subsequent years. Answer (c) is cor rect because the auditor need not recognize the change in the audit report and may issue a standard unmodifi ed opinion

Question 82

32. An uncertainty facing the fi rm relating to the possible future results of litigation fi led against client is most likely to result in which of the following types of audit report? a. Adverse with a basis for adverse opinion para graph. b. Qualifi ed due to a scope limitation. c. Qualifi ed with a basis for qualifi cation paragraph. d. Unqualifi ed with emphasis-of-matter paragraph.

Answer 82

32. (d) The requirement is to identify the proper audit re port relating to an uncertainty arising due to litigation. Answer (d) is correct because an uncertainty may result in either a an unqualifi ed opinion with an emphasis-of-matter paragraph or a disclaimer. Answer (a) is incorrect because an adverse opinion is not appropriate. Answers (c) and (d) are incorrect because a qualifi ed opinion is not appropriate.

Question 83

33. Wilson, CPA, completed gathering suffi cient appropriate audit evidence for the audit of Abco’s December 31, 20X8 fi nan cial statements on March 6, 20X9. A subsequent event requiring adjustment to the 20X8 fi nancial statements occurred on April 10, 20X9 and came to Wilson’s attention on April 24, 20X9. If the adjustment is made without dis closure of the event, Wil son’s report ordi narily should be dated a. March 6, 20X9. b. April 10, 20X9. c. April 24, 20X9. d. Using dual dating.

Answer 83

33. (a) The requirement is to determine the appropriate date for an audit report when a subsequent event requiring ad justment of fi nancial statements, without disclosure of the event, comes to the auditor’s attention. The professional standards state that the date suffi cient appropriate audit evi dence has been collected should be used in such circumstances.

Question 84

34. An auditor issued an audit report that was dual dated for a subsequent event occurring after the completion of fi eldwork but before issuance of the auditor’s report. The audi tor’s responsi bility for events occurring subsequent to the completion of fi eld work was a. Extended to subsequent events occurring through the date of issuance of the report. b. Extended to include all events occurring since the com pletion of fi eldwork. c. Limited to the specifi c event referenced. d. Limited to include only events occurring up to the date of the last subsequent event referenced.

Answer 84

34. (c) The requirement is to determine an auditor’s responsibility for subsequent events when an audit report has been dual dated for a subsequent event. Answer (c) is cor rect because, when dual dating is used, auditor responsibility for events subsequent to the completion of fi eldwork is lim ited to the specifi c event referred to in the notes to the fi nancial statement. Answers (a), (b), and (d) are all incor rect because they establish more responsibility than required by the professional standards. Note, however, that if the auditor chooses to date the report as of the date of the subse quent event, his/her responsibility for other subsequent events extends to the date of the audit report.

Question 85

35. An auditor includes a separate paragraph in an other wise unmodifi ed report to emphasize that the entity being reported on had signifi cant transactions with related parties. The inclusion of this separate paragraph a. Is considered an “except for” qualifi cation of the opin ion. b. Violates generally accepted auditing standards if this in formation is already disclosed in footnotes to the fi - nancial statements. c. Necessitates a revision of the opinion paragraph to include the phrase “with the foregoing expla-na tion.” d. Is appropriate and would not negate the unmodi fi ed opinion.

Answer 85

35. (d) The requirement is to identify the proper state ment about an audit report that includes a separate paragraph in an otherwise unmodifi ed report that emphasizes that the entity being reported on had signifi cant transactions with related par ties. Answer (d) is correct because such emphasis of a matter does not negate the unmodifi ed opinion. An swer (a) is incorrect be cause the report is considered un modifi ed. Answer (b) is in correct because such emphasis of a matter does not violate gen erally accepted auditing stand ards if this information is disclosed in notes to the fi nancial statements. Answer (c) is incorrect be cause the report should not include the phrase “with the forego ing explana tion.”

Question 86

36. Which of the following phrases should be included in the opinion paragraph when an auditor expresses a qualifi ed opin ion? When read in conjunction with Note X With the foregoing explanation a. Yes No b. No Yes c. Yes Yes d. No No

Answer 86

36. (d) The requirement is to determine whether the terms “when read in conjunction with Note X,” and “with the foregoing explanation” should be included in the opinion paragraph of a qualifi ed opinion. The professional standards state that an au dit report with a qualifi ed opinion should not include either phrase in the opinion paragraph.

Question 87

37. An auditor may not issue a qualifi ed opinion when a. An accounting principle at variance with GAAP is used. b. The auditor lacks independence with respect to the audited entity. c. A scope limitation prevents the auditor from com pleting an important audit procedure. d. The auditor’s report refers to the work of a special ist.

Answer 87

37. (b) The requirement is to identify the situation in which an auditor may not issue a qualifi ed opinion. An swer (b) is cor rect because the auditor who lacks indepen dence must disclaim an opinion, not qualify an opinion. Answer (a) is incorrect be cause a departure from GAAP will result in either a qualifi ed opinion or an adverse opinion. Answer (c) is incorrect because scope limitations result in either a qualifi ed opinion or a dis claimer of opinion. An swer (d) is incorrect because a specialist may be referred to when an auditor is issuing a qualifi ed opinion, an adverse opinion, or a disclaimer of opinion

Question 88

38. When an auditor expresses an adverse opinion, the opinion paragraph should include a. The principal effects of the departure from gener ally ac cepted accounting principles. b. A direct reference to a separate paragraph disclos ing the basis for the opinion. c. The substantive reasons for the fi nancial state ments be ing misleading. d. A description of the uncertainty or scope limitation that prevents an unmodifi ed opinion.

Answer 88

38. (b) The requirement is to identify the information that should be included in the opinion paragraph of an audit report with an adverse opinion. Answer (b) is correct be cause the opinion paragraph should include a direct reference to a separate paragraph disclosing the basis for the opin ion. Answer (a) is incorrect because the principal ef fects, if available, should be described in a separate emphasis-ofmatter paragraph, and not in the opinion para graph. Answer (c) is incorrect because while a separate paragraph provides a description of the substantive rea sons for the ad verse opinion, the opinion paragraph does not. Answer (d) is incorrect because neither an uncertainty nor a scope limi tation leads to an adverse opinion.

Question 89

39. An auditor concludes that a client’s illegal act, which has a material effect on the fi nancial statements, has not been properly accounted for or disclosed. Depending on the materiality of the effect on the fi nancial statements, the au ditor should express either a(n) a. Adverse opinion or a disclaimer of opinion. b. Qualifi ed opinion or an adverse opinion. c. Disclaimer of opinion or an unmodifi ed opinion with a separate emphasis-of-matter paragraph. d. Unmodifi ed opinion with a separate emphasis-ofmatter paragraph or a qualifi ed opinion.

Answer 89

39. (b) The requirement is to identify the appropriate types of audit reports when an illegal act with a material effect on the fi nancial statements has not been properly ac counted for or dis closed. Answer (b) is correct because omission of required dis closures, a departure from generally accepted accounting princi ples, leads to either a qualifi ed or an adverse opinion. Answer (a) is incorrect because a dis claimer of opinion is not appropriate when the auditor knows of such misstatements. Answer (c) is incorrect be cause neither a disclaimer of opinion nor an unmodi fi ed opinion with a separate emphasis-of-matter paragraph is appropri ate. Answer (d) is incorrect because an unmodifi ed opinion with a separate emphasis-of-matter paragraph is not appropriate.

Question 90

40. Which of the following phrases would an auditor most likely include in the auditor’s report when expressing a qualifi ed opin ion because of inadequate disclosure? a. Subject to the departure from US generally ac cepted ac counting principles, as described above. b. With the foregoing explanation of these omitted disclo sures. c. Except for the omission of the information dis cussed in the preceding paragraph. d. Does not present fairly in all material respects.

Answer 90

40. (c) The requirement is to identify the phrase that an auditor would include in an audit report with a qualifi ed opinion because of inadequate disclosure. Answer (c) is correct because the phrase “except for the omission of the information discussed in the opinion paragraph” is the proper phrase. Answers (a), (b), and (d) are all incorrect because they are phrases not allowed in reports with quali fi ed opinions.

Question 91

41. In which of the following circumstances would an audi tor be most likely to express an adverse opinion? a. The chief executive offi cer refuses the auditor ac cess to minutes of board of directors’ meetings. b. Tests of controls show that the entity’s internal con trol is so poor that it cannot be relied upon. c. The fi nancial statements are not in conformity with a FASB requirement regarding the capitalization of leases. d. Information comes to the auditor’s attention that raises substantial doubt about the entity’s ability to continue as a going concern.

Answer 91

41. (c) The requirement is to identify the circumstance that would most likely result in an auditor expressing an adverse opinion. Answer (c) is correct because departures from GAAP, such as inappropriately reporting leases, result in either a quali fi ed or an adverse opinion. Answer (a) is incorrect because client refusal to provide access to minutes is a client imposed scope limitation that will normally result in a disclaimer of opinion. Answer (b) is incorrect because weak internal control will not in general result in an adverse opinion; if controls are so weak that an audit cannot effec tively be completed, a disclaimer of opinion or withdrawal may be appropriate. Answer (d) is incorrect be cause sub stantial doubt about going concern status results in either an unmodifi ed opinion with an emphasis-of-matter para graph or a dis claimer of opinion.

Question 92

42. When an auditor qualifi es an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a basis for qualifi cation paragraph and mod ify the Introductory paragraph Auditor responsibility paragraphs Opinion paragraph a. Yes No No b. Yes Yes No c. No Yes Yes d. No No Yes

Answer 92

42. (d) The requirement is to identify the paragraphs of an audit report that are modifi ed when an auditor qualifi es an opin ion because of inadequate disclosure. In addition to requiring the inclusion of a separate basis for qualifi cation matter paragraph, AU-C 705 indicates that only the opinion paragraph should be modifi ed.

Question 93

43. If a publicly held company issues fi nancial statements that purport to present its fi nancial position and results of operations but omits the statement of cash fl ows, which of the following types of opinion is most likely to be appropri ate? a. Disclaimer of opinion. b. Qualifi ed opinion. c. Review report with negative assurance. d. Unmodifi ed opinion with a separate emphasis-ofmatter paragraph.

Answer 93

43. (b) The requirement is to determine the appropriate report modifi cation that results when the management of a pub licly held company issues fi nancial statements that purport to present its fi nancial position and results of opera tions but omits the statement of cash fl ows. Answer (b) is correct because failure to include a statement of cash fl ows in such a circumstance is considered a departure from GAAP and the appropriate choice here is a qualifi ed opinion.

Question 94

44. In which of the following situations would an auditor ordinar ily choose between expressing an “except for” quali fi ed opinion or an adverse opinion? a. The auditor did not observe the entity’s physical inven tory and is unable to become satisfi ed as to its balance by other auditing procedures. b. The fi nancial statements fail to disclose in forma tion that is required by generally accepted ac counting principles. c. The auditor is asked to report only on the entity’s balance sheet and not on the other basic fi nancial statements. d. Events disclosed in the fi nancial statements cause the au ditor to have substantial doubt about the en tity’s ability to continue as a going concern.

Answer 94

44. (b) The requirement is to identify the circumstance in which an auditor will choose between expressing an “ex cept for” qualifi ed opinion and an adverse opinion. An swer (b) is correct because omissions of required informa tion, a departure from generally accepted accounting princi ples, leads to either a quali fi ed or an adverse opinion. An swer (a) is incorrect because a scope limitation such as the failure to observe a client’s physical inventory leads to either a qualifi ed opinion or a disclaimer of opinion. An swer (c) is incorrect because an auditor may issue an unmodifi ed opin ion on one statement. Answer (d) is incorrect because sub stantial doubt about an entity’s ability to con tinue as a going concern leads to either an unmodifi ed report with ex plana tory language or a disclaimer of opinion.

Question 95

45. In which of the following situations would an auditor ordinar ily choose between expressing a qualifi ed opinion or an adverse opinion? a. The auditor did not observe the entity’s physical inventory and is unable to become satisfi ed about its bal ance by other auditing procedures. b. Conditions that cause the auditor to have substan tial doubt about the entity’s ability to continue as a going concern are inadequately disclosed. c. There has been a change in accounting principles that has a material effect on the comparability of the entity’s fi nancial statements. d. The auditor is unable to apply necessary procedures con cerning an investor’s share of an inves tee’s earnings recognized on the equity method.

Answer 95

45. (b) The requirement is to identify the situation in which an auditor will ordinarily choose between expressing a qualifi ed opinion or an adverse opinion. Answer (b) is correct because departures from generally accepted ac counting principles result in either a qualifi ed opinion or an adverse opinion—such lack of disclosure is a departure from generally accepted accounting principles. Answer (a) is incorrect because the inability to ob serve the physical in ventory and inability to become satisfi ed about its balance represents a scope limitation that will result in either a quali fi ed opinion or a disclaimer of opinion. Answer (c) is incor rect because a change in accounting principles leads to an unmodifi ed opinion with an emphasis-of-matter paragraph added to the report. Answer (d) is incorrect because inabil ity to apply necessary procedures represents a scope limita tion that will result in either a qualifi ed opinion or a dis claimer of opinion.

Question 96

46. In the fi rst audit of a client, an auditor was not able to gather suffi cient evidence about the consistent application of accounting principles between the current and the prior year, as well as the amounts of assets or liabilities at the beginning of the current year. This was due to the client’s record re tention policies. If the amounts in question could materially affect current operating results, the auditor would a. Be unable to express an opinion on the current year’s re sults of operations and cash fl ows. b. Express a qualifi ed opinion on the fi nancial state ments because of a client-imposed scope limita tion. c. Withdraw from the engagement and refuse to be associ ated with the fi nancial statements. d. Specifi cally state that the fi nancial statements are not comparable to the prior year due to an uncer tainty.

Answer 96

46. (a) The requirement is to identify the type of opin ion that should be issued on the fi nancial statements when an auditor has been unable to obtain suffi cient evidence re lating to the con sistent application of accounting principles be tween the current and prior year. Answer (a) is correct be cause the scope limita tion will affect the year’s beginning balances and thereby affect the current year’s results of op erations and cash fl ows. Answer (b) is incorrect because the year-end balance sheet will be unaf fected by the scope limi tation (any retained earnings misstate ment of the preceding year will be offset in the current year). Answer (c) is incor rect because the auditor need not withdraw in such circum stances. Answer (d) is incorrect because this situa tion repre sents a scope limitation, and not an uncertainty.

Question 97

47. In which of the following circumstances would an audi tor not express an unmodifi ed opinion? a. There has been a material change between periods in ac counting principles. b. Quarterly fi nancial data required by the SEC has been omitted. c. The auditor wishes to emphasize an unusually important subsequent event. d. The auditor is unable to obtain audited fi nancial statements of a consolidated investee.

Answer 97

47. (d) The requirement is to identify the circumstance in which an auditor would not express an unmodifi ed opinion. Answer (d) is correct because an inability to obtain the audited fi nancial statements of a consolidated investee represents a scope limitation, and a signifi cant scope limita tion results in either a qualifi ed opinion or a disclaimer of opin ion. Answer (a) is incor rect because a material change be tween periods in accounting principles will result in an emphasis-ofmatter paragraph being added to a report with an unmodifi ed opinion. Answer (b) is incorrect because the omis sion of the SEC required quarterly fi nancial data, which is considered “unaudited,” results in a report with an un modifi ed opinion with an emphasis-of-matter para graph. Answer (c) is incorrect because an auditor’s emphasis of an unusually important subsequent event results in a report with an unmodifi ed opinion with an emphasis-of-matter para graph.

Question 98

48. Due to a scope limitation, an auditor disclaimed an opinion on the fi nancial statements taken as a whole, but the auditor’s report included a statement that the current asset portion of the entity’s balance sheet was fairly stated. The inclusion of this statement is a. Not appropriate because it may tend to overshadow the auditor’s disclaimer of opinion. b. Not appropriate because the auditor is prohibited from reporting on only one basic fi nancial state ment. c. Appropriate provided the auditor’s scope para graph ad equately describes the scope limitation. d. Appropriate provided the statement is in a separate par agraph preceding the disclaimer of opinion par agraph.

Answer 98

48. (a) The requirement is to determine the propriety of including a statement that the current asset portion of an entity’s balance sheet was fairly stated in an audit report that disclaims an opinion on the overall fi nancial statements. Answer (a) is correct because expressions of opinion as to certain identifi ed items in fi nancial statements (referred to as “piecemeal opinions”) should not be expressed when the auditor has disclaimed an opinion or has expressed an ad verse opinion. Such opinions tend to over shadow or contra dict the disclaimer or adverse opinion. An swer (b) is incor rect because an auditor may report on one basic fi nancial statement. Answers (c) and (d) are incorrect because pro viding such assurance is not appropriate.

Question 99

49. Park, CPA, was engaged to audit the fi nancial state ments of Tech Co., a new client, for the year ended Decem ber 31, 2009. Park obtained suffi cient audit evidence for all of Tech’s fi nancial statement items except Tech’s opening inventory. Due to inade quate fi nancial records, Park could not verify Tech’s January 1, 2009 inventory balances. Park’s opinion on Tech’s 2009 fi nan cial statements most likely will be Balance sheet Income statement a. Disclaimer Disclaimer b. Unmodifi ed Disclaimer c. Disclaimer Adverse d. Unmodifi ed Adverse

Answer 99

49. (b) The requirement is to identify the type of opin ion that should be issued on the balance sheet and the in come state ment when an auditor did not observe a client’s taking of the beginning physical inventory and was unable to become satisfi ed about its accuracy by using other auditing procedures. An swer (b) is correct because the scope limita tion will not affect the year-end balance sheet account bal ances. However, because evidence with respect to the beginning inventory is lacking, veri fi cation of cost of goods sold, an income statement element, is impossible. Although year-end retained earnings will not be affected, both the current and prior years’ retained earnings statements will be affected (by an offsetting amount) by the cost of goods sold misstatement. If no other problems arise, the audi tor will be able to issue an unmodifi ed opinion on the balance sheet and a disclaimer on the income statement (and on the re tained earnings statement). Answer (a) is incorrect because an unmodifi ed opinion may be issued on the balance sheet. An swer (c) is incorrect because an unmodifi ed opinion may be issued on the balance sheet with a disclaimer on the in come statement. Answer (d) is incorrect because a dis claimer should be issued on the income statement.

Question 100

50. An auditor who qualifi es an opinion because of an in suffi - ciency of audit evidence should describe the limita tions in a basis for modifi cation paragraph. The auditor should also refer to the limitation in the Auditor’s responsibility section Opinion paragraph Notes to the fi nancial statements a. Yes No Yes b. No Yes No c. Yes Yes No d. Yes Yes Yes

Answer 100

50. (c) The requirement is to determine whether the audi tor responsibility section, opinion paragraph, and/or notes to the fi nancial statements should refer to an audit scope limitation. Answer (c) is correct because the sug gested report presented for a scope limitation includes modi fi cation of both the scope and opinion paragraphs. In addi tion, it is not appro priate for the scope of the audit to be explained in a note to the fi nancial state ments.

Question 101

51. Harris, CPA, has been asked to audit and report on the bal ance sheet of Fox Co. but not on the statements of in come, re tained earnings, or cash fl ows. Harris will have access to all in formation underlying the basic fi nancial statements. Under these circumstances, Harris may a. Not accept the engagement because it would con stitute a violation of the profession’s ethical stan d ards. b. Not accept the engagement because it would be tan tamount to rendering a piecemeal opinion. c. Accept the engagement because such engagements merely involve limited reporting objectives. d. Accept the engagement but should disclaim an opinion because of an inability to apply the proce dures consid ered necessary

Answer 101

51. (c) The requirement is to identify a CPA’s responsibility when asked to report on only one fi nancial statement. An swer (c) is correct because the auditor may accept the engage ment because the situation involves limited reporting objectives, not a limitation on the scope of audit procedures. Answers (a), (b), and (d) are incorrect because the auditor is able to accept such an engagement and because the auditor is able to apply the procedures considered necessary.

Question 102

52. When disclaiming an opinion due to a client-imposed scope limitation on a nonpublic company’s fi nancial statements, an auditor should indicate in a separate paragraph why the audit did not comply with generally ac cepted au diting standards. The auditor should also omit which of the two sections (paragraphs) below? Auditor responsibility Opinion a. No Yes b. Yes Yes c. Yes No d. No No

Answer 102

52. (d) The requirement is to determine whether either the auditor’s responsibility section, the opinion paragraph, or both should be deleted when an auditor is disclaiming an opinion due to a client-imposed scope limitation. An swer (d) is correct be cause neither the auditor responsibility section nor the opinion paragraph is deleted, although they are both modifi ed Answer (a) is incorrect because it sug gests that the opinion paragraph is omitted. Answer (b) is incor rect because it states that both the auditor responsibility par agraph and the opinion paragraph are omitted. An swer (c) is incorrect be cause it states that the opin ion para graph is omitted.

Question 103

53. An auditor decides to issue a qualifi ed opinion on an entity’s fi nancial statements because a major inadequacy in its comput erized accounting records prevents the auditor from applying necessary procedures. The opinion paragraph of the auditor’s report should state that the qualifi cation pertains to a. A client-imposed scope limitation. b. A departure from generally accepted auditing stan dards. c. The possible effects on the fi nancial statements. d. Inadequate disclosure of necessary information.

Answer 103

53. (c) The requirement is to identify the information included in the opinion paragraph of an auditor’s report that is qualifi ed due to a major inadequacy in the computerized ac counting records. Answer (c) is correct because the opin ion paragraph indicates that the exception is due to the pos sible ef fects on the fi nancial statements. Answer (a) is in correct because the opinion paragraph will not include a reference to client-im posed scope limitations. Answer (b) is incorrect because no indication of a departure from generally accepted auditing stand ards is provided in the opinion para graph and this situation is not a departure from GAAS. An swer (d) is incorrect because there is no indication that there is inadequate disclosure of necessary information.

Question 104

54. A scope limitation suffi cient to preclude an unmodifi ed opinion always will result when management a. Prevents the auditor from reviewing the working papers of the predecessor auditor. b. Engages the auditor after the year-end physical inventory is completed. c. Requests that certain material accounts receivable not be confi rmed. d. Refuses to acknowledge its responsibility for the fair presentation of the fi nancial statements in con formity with GAAP.

Answer 104

54. (d) The requirement is to identify the circumstance in which a scope limitation is suffi cient to preclude an un modifi ed opinion. Answer (d) is correct because AU-C 580 states that management’s refusal to furnish such a written repre sentation constitutes a limitation on the scope of an audit suffi cient to pre clude an unmodifi ed opinion. An swers (a), (b), and (c) are all incorrect because while they represent scope limitations, they may sometimes not result in a report that is other than unmodi fi ed.

Question 105

55. An auditor concludes that extreme doubt exists about the integrity of management and the representations obtained from management relating to the fairness of the fi nancial statements and the completeness of the record of transac tions. If the auditor retains the client, which audit report is most likely to be appropriate? a. Unmodifi ed with emphasis-of-matter paragraph. b. Standard unmodifi ed. c. Disclaimer. d. Adverse

Answer 105

55. (c) The requirement is to determine the proper audit report when an auditor has doubt as to the integrity of manage ment and the representations obtained from management and has not decided to resign. Answer (c) is correct be cause the professional standards consider this as a scope limitation and accordingly its signifi cant nature makes a disclaimer most likely. An swer (a) is incorrect because an unmodifi ed opinion is not appropriate due to the lack of suffi cient appropriate audit evi dence due to the doubt con cerning management’s integrity. An swer (b) is incorrect because the lack of confi dence in manage ment’s integrity makes an unmodifi ed opinion inappropriate. Answer (d) is incorrect be cause the auditor is not aware of sig nifi cant mis statements that would lead to an adverse opinion.

Question 106

56. In which of the following situations would an auditor ordinar ily issue an unmodifi ed audit opinion without an emphasis-of-matter paragraph? a. The auditor wishes to emphasize that the entity had sig nifi cant related-party transactions. b. The auditor decides to make reference to the report of an auditor who audited a component of group fi nancial statements. c. The entity issues fi nancial statements that present fi nan cial position and results of operations, but omits the statement of cash fl ows. d. The auditor has substantial doubt about the entity’s abil ity to continue as a going concern, but the cir cumstances are fully disclosed in the fi nancial statements.

Answer 106

56. (b) The requirement is to determine the situation in which an auditor would ordinarily issue an unmodifi ed au dit opinion without an emphasis-of-matter paragraph. An swer (b) is correct because when an auditor makes reference to the re port of another auditor no additional paragraph is added to the report. Answer (a) is incorrect because empha sizing that the entity had signifi cant related-party transac tions is normally accomplished through the addition of an emphasisof- matter paragraph. An swer (c) is incorrect be cause the omission of a statement of cash fl ows when an entity issues fi nancial statements that present fi nancial posi tion and result of operations results in a qualifi ed audit opinion with basis for qualifi ed opinion paragraph. An swer (d) is incorrect because substantial doubt about the entity’s ability to continue as a going concern normally re sults in either an unmodifi ed opin ion with an emphasis-of-matter paragraph or a disclaimer of opin ion.

Question 107

57. A group engagement partner decides not to refer to the audit of another CPA who audited a component of the overall group fi nancial statements. After making inquiries about the other CPA’s professional reputation and independence, the prin cipal au ditor most likely would a. Add an emphasis-of-matter paragraph to the audi tor’s re port indicating that the subsidiary’s fi nan cial statements are not material to the consolidated fi nancial statements. b. Document in the engagement letter that the prin ci pal auditor assumes no responsibility for the other CPA’s work and opinion. c. Obtain written permission from the other CPA to omit the reference in the principal auditor’s report. d. Perform additional audit procedures

Answer 107

57. (d) The requirement is to determine a group engage ment partner’s responsibility, in addition to making inquiries of the other auditor’s reputation and independence, after having decided not to refer to the audit of the component (other) audi tor. An swer (d) is correct because when a deci sion is made not to make reference to the component audi tor—that is, to take responsi bility for that auditor’s work—the group auditor should perform additional procedures de pendent upon the signifi cance of the component. Answer (a) is incorrect because no emphasis-of-matter paragraph is added to the audit report. Answer (b) is incorrect because the group engagement partner is assuming responsi bility for the component auditor’s work when a decision is made not to refer to the component auditor’s report. An swer (c) is in correct because written permission is not required when the group engagement partner is taking responsibility for the work of the other auditor.

Question 108

58. The auditor’s responsibility section of a nonpublic company’s auditor’s report con tains the following sentences: We did not audit the fi nancial statements of EZ Inc., a wholly owned subsidiary, which statements refl ect total assets and revenues constituting 27% and 29%, respectively, of the related consolidated totals. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for EZ Inc., is based solely on the report of the other auditors. These sentences a. Indicate a division of responsibility. b. Assume responsibility for the other auditor. c. Require a departure from an unmodifi ed opinion. d. Are an improper form of reporting.

Answer 108

58. (a) The requirement is to determine the meaning of sentences added to the auditor responsibility section of an audi tor’s report that states that another auditor audited a portion of the entity. Answer (a) is correct because the professional stand ards provide that such a statement indicates a division of respon sibility. An swer (b) is incorrect because when the other auditor is re ferred to the CPA, the CPA is not assuming responsibility for the other auditor. Answer (c) is incorrect because an unmodifi ed opinion may be issued. Answer (d) is incorrect because the sen tences are proper

Question 109

59. An auditor may issue the standard audit report when the a. Auditor refers to the fi ndings of a specialist. b. Financial statements are derived and summarized from complete audited fi nancial statements that are fi led with a regulatory agency. c. Financial statements are prepared on the cash re ceipts and disbursements basis of accounting. d. Group engagement partner assumes responsibility for the work of a component auditor.

Answer 109

59. (d) The requirement is to identify the situation in which an auditor may issue the standard audit report. An swer (d) is correct because a standard report may be issued in circumstances in which the principal auditor assumes responsibility for the work of another auditor. Answer (a) is incorrect because the standard report does not include refer ence to a specialist. Thus, reference to a specialist within a report by defi nition causes modifi cation of the standard re port. Answer (b) is incorrect because the auditor is required to issue a modifi ed report on condensed fi nancial statements. Answer (c) is incorrect because audit reports on fi nancial statements prepared using a fi nancial reporting frame work other than GAAP require departures from the standard form.

Question 110

60. In the auditor’s report, the group engagement partner decides not to make reference to a component auditor who audited a client’s subsidiary. The group engagement partner could justify this decision if, among other requirements, he or she a. Issues an unmodifi ed opinion on the consolidated fi nan cial statements. b. Learns that the component auditor issued an unmodifi ed opi nion on the subsidiary’s fi nancial statements. c. Is unable to review the audit plan (programs) and work ing pa pers of the component auditor. d. Is satisfi ed as to the independence and professional repu tation of the other CPA.

Answer 110

60. (d) The requirement is to determine a group engage ment partner’s reporting responsibility when a decision has been made to not make reference to a component auditor who has audited a client’s subsidiary. Answer (d) is correct because, re gard less of whether the component auditor is referred to, the group engagement partner must be satisfi ed as to the independence and profes sional reputation of the other CPA. Answer (a) is incorrect because the group en gagement partner need not issue an unmodifi ed opinion on the consolidated fi nancial statements. An swer (b) is incor rect because it is not necessary that the com ponent auditor issue an unmodifi ed opinion on the subsidiary’s fi nan cial statements. Answer (c) is incorrect because the group en gagement partner should consider a variety of procedures depending upon the signifi cance of the subsidiary when a deci sion is made to not make reference to the component auditor

Question 111

61. When fi nancial statements of a company that follows GASB standards would be misleading due to unusual circumstances depart from those standards, the auditor should explain the unu sual circumstances in a separate paragraph and express an opin ion that is a. Unmodifi ed. b. Qualifi ed. c. Adverse. d. Qualifi ed or adverse, depending on materiality

Answer 111

61. (a) The requirement is to determine the type of opin ion to be issued when fi nancial statements of an entity that follows GASB standards include a justifi ed departure from GAAP. An swer (a) is correct because the auditor should issue an unmodi fi ed opinion and should include a separate emphasisof- matter paragraph explaining the de parture from GAAP. Answers (b), (c), and (d) are incorrect because when the auditor believes that the departure is justi fi ed, neither a qualifi ed nor adverse opinion is appropriate.

Question 112

62. A client follows US GAAP for its domestic operations and foreign GAAP for a foreign subsidiary. The foreign subsidiary is audited by a component auditor, while the group auditor audits the remainder of the corporation and issues an audit report on consolidated operations. Which auditor(s) is (are) responsible for evaluating the appropriateness of the adjustment of the foreign GAAP statements to US GAAP? Group auditor Component auditor a. Yes Yes b. Yes No c. No Yes d. No No

Answer 112

62. (b) The requirement is to determine which auditor(s) is (are) responsible for evaluating the appropriateness of the ad justment of foreign fi nancial statements consolidated with US GAAP fi nancial statements in a group audit situation. Answer (b) is cor rect because the group auditor is responsible. Answer (a) is in correct because the component auditor is not respons ible. Answer (c) is incorrect because the group auditor is respon sible and the component auditor is not. Answer (d) is incorrect because the group auditor is responsible.

Question 113

63. In May 20X9, an auditor reissues the auditor’s report on the 20X7 fi nancial statements at a continuing client’s request. The 20X7 fi nancial statements are not restated and the auditor does not revise the wording of the report. The auditor should a. Dual date the reissued report. b. Use the release date of the reissued report. c. Use the original report date on the reissued report. d. Use the current period auditor’s report date on the reis sued report.

Answer 113

63. (c) The requirement is to determine the proper date of a reissued audit report on fi nancial statements that have not been restated. Answer (c) is correct because use of the original date on the reissued audit report removes any impli cation that rec ords, transactions or events after the date of the audit report have been examined or reviewed.

Question 114

64. When reporting on comparative fi nancial statements, an auditor ordinarily should change the previously issued opin ion on the prior year’s fi nancial statements if the a. Prior year’s fi nancial statements are restated to conform with generally accepted accounting prin ciples. b. Auditor is a predecessor auditor who has been requested by a former client to reissue the previously is sued report. c. Prior year’s opinion was unmodifi ed and the opin ion on the current year’s fi nancial statements is modifi ed due to a lack of consistency. d. Prior year’s fi nancial statements are restated fol low ing a pooling of interests in the current year.

Answer 114

64. (a) The requirement is to identify the circumstance in which an auditor reporting on comparative fi nancial statements would ordinarily change the previously issued opinion on the prior year’s fi nancial statements. Answer (a) is correct because when an auditor has previously expressed a qualifi ed or an ad verse opinion on fi nancial statements of a prior period and those fi nancial statements have been restated, the auditor’s updated report is changed. Answer (b) is incorrect because, ordinarily, the reissued report by a prede cessor auditor will be the same as that originally issued. Answer (c) is incorrect because the prior year’s opinion will remain unmodifi ed if the current year’s audit report is modifi ed due to a lack of consistency. Answer (d) is incorrect because restatement of prior year’s fi nancial statements following a pooling of interest will not lead to a change in the previously issued opinion.

Question 115

65. Jewel, CPA, audited Infi nite Co.’s prior year fi nancial state ments. These statements are presented with those of the current year for comparative purposes without Jewel’s auditor’s report, which expressed a qualifi ed opinion. In drafting the current year’s auditor’s report, Crain, CPA, the successor auditor, should I. Not name Jewel as the predecessor auditor. II. Indicate the type of report issued by Jewel. III. Indicate the substantive reasons for Jewel’s qualifi ca tion. a. I only. b. I and II only. c. II and III only. d. I, II, and III.

Answer 115

65. (d) The requirement is to determine the information to be included in an audit report on comparative fi nancial state ments when a predecessor auditor’s report is not being reissued. Answer (d) is correct because an other-matter paragraph should be added to the successor’s report and it should indicate (1) that the fi nancial statements of the prior period were audited by an other auditor (whose name is not presented), (2) the date of the predecessor’s report, (3) the type of report issued by the prede cessor, and (4) if the report was other than a stan dard report, the substantive reasons therefor.

Question 116

66. Before reissuing the prior year’s auditor’s report on the fi nan cial statements of a former client, the predecessor au ditor should obtain a letter of representations from the Former client’s management Successor auditor a. Yes Yes b. Yes No c. No Yes d. No No

Answer 116

66. (a) The requirement is to determine whether the predecessor auditor should obtain a representation letter from management, the successor auditor, or both, before reissuing the prior year’s audit record. Answer (a) is correct because the pre decessor auditor should obtain a representa tion letter from both management and the succes sor auditor.

Question 117

67. When single-year fi nancial statements are presented, an auditor ordinarily would express a standard audit report if the a. Auditor is unable to obtain audited fi nancial statements supporting the entity’s investment in a for eign affi liate. b. Entity declines to present a statement of cash fl ows with its balance sheet and related statements of income and retained earnings. c. Auditor wishes to emphasize an accounting matter affecting the comparability of the fi nancial state ments with those of the prior year. d. Prior year’s fi nancial statements were audited by another CPA whose report, which expressed an unmodifi ed opinion, is not presented.

Answer 117

67. (d) The requirement is to identify the circumstance in which a standard unmodifi ed report may be issued when single-year fi nancial statements are presented. Answer (d) is correct because when the prior year’s fi nancial statements are not being presented, the CPA need not refer to them or include the prede cessor auditor’s report. An swer (a) is in correct because inability to audit an investment in a foreign affi liate is a scope limitation that is likely to result in either a qualifi ed opinion or a disclaimer. An swer (b) is incorrect because a qualifi ed opinion is appropri ate when an entity declines to present a statement of cash fl ows with its balance sheet and related statements of in come and retained earn ings. Answer (c) is incorrect because the emphasis of an accounting matter by an auditor results in inclusion of an empha sis-ofmatter paragraph to the unmodifi ed audit report.

Question 118

68. A client is presenting comparative (two-year) fi nancial state ments. Which of the following is correct concerning reporting responsibilities of a continuing auditor? a. The auditor should issue one audit report that is on both presented years. b. The auditor should issue two audit reports, one on each year. c. The auditor should issue one audit report, but only on the most recent year. d. The auditor may issue either one audit report on both presented years, or two audit reports, one on each year.

Answer 118

68. (a) The requirement is to identify the correct form of an audit report on comparative fi nancial statements when a contin uing auditor has audited the two years of fi nancial statements being presented. Answer (a) is correct because one audit report should be issued that includes the years involved. Answer (b) is incorrect because one report, not two reports, should be issued. Answer (c) is incorrect be cause both years should be reported upon. Answer (d) is incorrect because auditors do not have the option of issuing two audit reports in this circumstance.

Question 119

69. The predecessor auditor, who is satisfi ed after properly communicating with the successor auditor, has reissued a report because the audit client desires comparative fi nancial statements. The predecessor auditor’s report for a nonpublic company should make a. Reference to the report of the successor auditor only in another matter paragraph b. Reference to the work of the successor auditor in an other matter paragraph and in the opinion paragraph. c. Reference to both the work and the report of the succes sor auditor only in the opinion paragraph. d. No reference to the report or the work of the succes sor auditor.

Answer 119

69. (d) The requirement is to determine the manner in which a predecessor auditor who has reissued a report for comparative fi nancial statements should refer to the succes sor auditor. The predecessor auditor should not refer in the reissued report to the report or work of the successor auditor.

Question 120

70. Compiled fi nancial statements for the prior year pre sented in comparative form with audited fi nancial statements for the current year should be clearly marked to indicate their status and I. The report on the prior period should be reissued to accom pany the current period report. II. The report on the current period should include as a sepa rate paragraph a description of the responsibility assumed for the prior period’s fi nancial statements. a. I only. b. II only. c. Both I and II. d. Either I or II.

Answer 120

70. (d) The requirement is to determine the proper re port ing procedure for comparative fi nancial statements for which the prior year is compiled, and the current year is audited. When compiled fi nancial state ments are presented in comparative form with audited fi nan cial statements, the report on the prior period may be reis sued to accompany the current period report. Alternatively, the report on the current period may include a separate para graph describing respon sibility assumed for the prior period fi nancial statements.

Question 121

71. An auditor concludes that there is a material inconsistency in the other information in an annual report to shareholders con taining audited fi nancial statements. If the au ditor concludes that the fi nancial statements do not require revision, but the client refuses to revise or eliminate the ma terial inconsistency, the audi tor may a. Revise the auditor’s report to include a separate empha sis-of-matter paragraph describing the mate rial incon sistency. b. Issue an “except for” qualifi ed opinion after discussing the matter with the client’s board of direc tors. c. Consider the matter closed since the other infor ma tion is not in the audited fi nancial statements. d. Disclaim an opinion on the fi nancial statements af ter ex plaining the material inconsistency in a sepa rate basis for disclaimer paragraph.

Answer 121

71. (a) The requirement is to identify the auditor’s re porting responsibility for a material inconsistency between the au dited fi nancial statements and the other information in an annual report to shareholders containing audited fi nancial statements. Answer (a) is correct because AU-C 720 states that if a material inconsistency exists and the client refuses to revise the other information, the auditor should include an emphasis-of-matter paragraph that explains the incon sistency. The auditor may also withhold the use of the audit report or the auditor may withdraw from the engagement. Answer (b) is incorrect because the fi nan cial statements are not misstated. Answer (c) is incorrect be cause the auditor must review the other information to ensure that it is con sistent with the |fi nancial statements. Answer (d) is incorrect because the fi nancial statements are not misstated and there fore a disclaimer of opinion is inappropriate.

Question 122

72. When audited fi nancial statements are presented in a client’s document containing other information, the auditor should a. Perform inquiry and analytical procedures to ascer tain whether the other information is reasonable. b. Add an emphasis-of-matter paragraph to the audi tor’s re port without changing the opinion on the fi nancial statements. c. Perform the appropriate substantive auditing procedures to corroborate the other information. d. Read the other information to determine that it is consistent with the audited fi nancial statements.

Answer 122

72. (d) The requirement is to determine an auditor’s responsibility when audited fi nancial statements are pre sented in a document containing other information. An swer (d) is correct because the auditor is required to read the other information to determine that it is consistent with the audited fi nancial state ments. Answers (a) and (c) are incor rect because no such in quiry, analytical procedures, or other substantive auditing proce dures are required. Answer (b) is incorrect because, unless the information seems incorrect or inconsistent with the audited fi nancial statements, no emphasis-of-matter paragraph needs to be added to the auditor’s report.

Question 123

73. An auditor may express an opinion on an entity’s accounts receivable balance even if the auditor has disclaimed an opinion on the fi nancial statements taken as a whole provided the a. Report on the accounts receivable discloses the rea son for the disclaimer of opinion on the fi nan cial statements. b. Distribution of the report on the accounts receivable is restricted to internal use only. c. Auditor also reports on the current asset portion of the entity’s balance sheet. d. Report on the accounts receivable is presented separately from the disclaimer of opinion on the fi nancial statements.

Answer 123

73. (d) The requirement is to identify the manner in which an auditor may express an opinion on an entity’s ac counts receiv able when that auditor has disclaimed an opin ion on the fi nancial statements taken as a whole. An swer (d) is correct because such a report is considered a “specifi ed elements, accounts, or items report,” and should include the opinion on the accounts receivable separately from the dis claimer of opinion on the fi nancial statement. Answer (a) is incorrect because reason for the dis claimer of opinion need not be provided. Answer (b) is incorrect be cause distribu tion of such a report is not restricted to internal use only. Answer (c) is incorrect because the auditor need not report on the current asset portion of the entity’s balance sheet to issue such a report.

Question 124

74. In an audit of a nonissuer company, which statement is correct concerning required supplementary information by a designated accounting standards setter? a. The auditor has no responsibility for required sup plementary information as long as it is outside the basic fi nancial statements. b. The auditor’s only responsibility for required sup plementary information is to determine that such information has not been omitted. c. The auditor should apply certain limited proce dures to the required supplementary information, and report defi ciencies in, or omissions of, such in formation. d. The auditor should apply tests of details of transactions and balances to the required supplementary infor mation, and report any material misstatements in such information.

Answer 124

74. (c) The requirement is to identify an auditor’s re sponsibility for required supplementary information that is placed out side the basic fi nancial statements. Answer (c) is correct because AU-C 730 requires that the auditor apply lim ited procedures to the information and report defi ciencies in, or the omission of, the information. Answer (a) is incorrect because the auditor does have some responsibility for the supplementary information. Answer (b) is incorrect because the auditor must apply limited procedures to information presented and report defi ciencies in the information in addition to determining whether it has been omitted. Answer (d) is incorrect because tests of details of trans actions and bal ances need not be performed.

Question 125

75. If management declines to present supplementary information required by the Governmental Accounting Standards Board (GASB), the auditor should issue a(n) a. Adverse opinion. b. Qualifi ed opinion with an other-matter para graph. c. Unmodifi ed opinion. d. Unmodifi ed opinion with an additional other-matter paragraph.

Answer 125

75. (d) The requirement is to determine the proper audit report when management declines to present supplementary information required by the Governmental Accounting Standards Board. Answer (d) is correct because omission of required supplementary information, which when presented is not consid ered audited, leads to an unmodifi ed opinion with an other -matter paragraph. Answers (a) and (b) are incorrect because neither an adverse opinion nor a quali fi ed opinion is appropriate since the supplementary infor mation is not audited. Answer (c) is incorrect because it is incom plete since an unmodifi ed opinion with an additional other-matter paragraph is required.

Question 126

76. If an auditor is asked to provide an opinion relating to infor mation accompanying the fi nancial statements in a document, the opinion will ordinarily be upon whether the information is fairly stated in a. Accordance with US generally accepted auditing standards. b. Conformity with US generally accepted accounting prin ciples. c. All material respects in relation to the basic fi nan cial statements taken as a whole. d. Accordance with attestation standards expressing a con clusion about management’s assertions

Answer 126

76. (c) The requirement is to identify the correct state ment that may be included in an auditor’s report when an auditor pro vides an opinion on information accompanying the basic fi nan cial statements. Answer (c) is correct because the report indi cates whether the accompanying information is fairly stated in all material respects in relation to the basic fi nancial statements taken as a whole. Answer (a) is incor rect because the infor mation is not presented in accordance with generally accepted auditing standards. Answer (b) is incorrect because the infor mation is in addition to that re quired by generally accepted ac counting principles. An swer (d) is incorrect because it is not in accordance with attestation standards.

Question 127

77. Which of the following statements is correct concerning an auditor’s responsibility for controlling the distribution by the client of a restricted-use report? a. An auditor must make clear to the client that it is illegal to distribute such a report beyond to speci fi ed parties. b. When an auditor is aware that a client has distri b uted a restricted-use report to inappropriate third parties, the auditor should immediately inform the client to cease and desist. c. An auditor controls distribution through insisting that the client not duplicate the restricted-use report for any purposes. d. An auditor is not responsible for controlling the distribution of such reports.

Answer 127

77. (d) The requirement is to determine an auditor’s responsibility for controlling the distribution by the client of a restricted-use report. Answer (d) is correct because the professional standards state that an auditor is not responsible for con trolling the distribution of such reports. Answer (a) is incorrect be cause while an auditor should consider in forming a client that restricted-use reports are not intended for such distribu tion, there is no such requirement and such distribution may or may not be legal. Answer (b) is incor rect because the auditor need not inform the client to cease and desist. Answer (c) is incorrect because an auditor need not insist that the client not duplicate the restricted-use re port.

Question 128

78. Which of the following types of reports is most likely to include an alert as to its use being restricted to certain specifi ed parties? a. Audit report. b. Review report. c. Compilation report. d. Agreed-upon procedures report.

Answer 128

78. (d) The requirement is to identify the type of report that is most likely to include an alert to readers that its use is restricted to certain specifi ed users. Answer (d) is correct because all agreed-upon procedures reports are so restricted. Although au dit, review, or compilations reports may be so restricted, there is no requirement that they be.

Question 129

79. Which of the following is least likely to be a restricted use report? a. A report on internal control signifi cant defi ciencies noted in an audit. b. A required communication with the audit commit tee. c. A report on fi nancial statements prepared follow ing a fi nancial reporting framework other than generally accepted accounting principles. d. A report on compliance with aspects of contractual agreements

Answer 129

79. (c) The requirement is to identify the report that is least likely to be a restricted-use report. Answer (c) is correct because reports on most fi nancial reporting frameworks other than GAAP are not restricted. An swers (a) and (b) are incorrect because reports on signifi cant defi ciencies and reports to audit committees are restricted under the professional standards. An swer (d) is incorrect because a report on compliance is restricted.

Question 130

80. An auditor expressed a qualifi ed opinion on the prior year’s fi nancial statements because of a lack of adequate disclosure. These fi nancial statements are properly restated in the current year and presented in comparative form with the current year’s fi nancial statements. The auditor’s up dated report on the prior year’s fi nancial statements should a. Be accompanied by the auditor’s original report on the prior year’s fi nancial statements. b. Continue to express a qualifi ed opinion on the prior year’s fi nancial statements. c. Make no reference to the type of opinion expressed on the prior year’s fi nancial statements. d. Express an unmodifi ed opinion on the restated fi nancial statements of the prior year.

Answer 130

80. (d) The requirement is to determine auditor report ing responsibility when prior period fi nancial statements which received a qualifi ed opinion due to a lack of adequate disclosure have been restated to eliminate the lack of disclo sure. Answer (d) is correct because an auditor should ex press an unmod ifi ed opinion on the restated fi nancial state ments of the prior year (with an emphasis-of-matter paragraph describing the circum stance). Answer (a) is in correct because the auditor’s original report is not reissued. Answer (b) is incorrect because the quali fi ed opinion is eliminated. Answer (c) is incorrect because refer ence to the type of opinion expressed is included in the reissued report’s emphasis-of-matter paragraph.

Question 131

81. Before reporting on the fi nancial statements of a US entity that have been prepared in conformity with another country’s accounting principles, an auditor practicing in the US should a. Understand the accounting principles generally accepted in the other country. b. Be certifi ed by the appropriate auditing or accoun tancy board of the other country. c. Notify management that the auditor is required to disclaim an opinion on the fi nancial statements. d. Receive a waiver from the auditor’s state board of accountancy to perform the engagement

Answer 131

81. (a) The requirement is to identify audit reporting re quirements when reporting on fi nancial statements of a US entity prepared in accordance with another country’s ac counting prin ciples. Answer (a) is correct because AU-C 910 states that the auditor should understand the accounting principles generally accepted in the other country. An swer (b) is incorrect because the auditor does not have to obtain certifi cation outside of the United States. Answer (c) is incorrect because the auditor does not have to disclaim an opinion. Answer (d) is incorrect because the auditor does not have to receive a waiver from the auditor’s state board of accountancy.

Question 132

82. The fi nancial statements of KCP America, a US entity, are prepared for inclusion in the consolidated fi nancial statements of its non-US parent. These fi nancial statements are prepared in conformity with the accounting principles generally accepted in the parent’s country and are for use only in that country. How may KCP America’s auditor re port on these fi nancial statements? I. A US-style report (unmodifi ed). II. A US-style report modifi ed to report on the accounting principles of the parent’s country. III. The report form of the parent’s country. I II III a. Yes No No b. No Yes No c. Yes No Yes d. No Yes Yes

Answer 132

82. (d) The requirement is to determine the appropriate types of reports that may be issued when the fi nancial statements of a US subsidiary are prepared following the prin ciples of a non-US parent company’s country for inclusion in that parent com pany’s non-US consolidated fi nancial statements. AU-C 910 allows either a modifi ed US style report or the report form of the parent’s country. A US style un modifi ed report is not appropri ate.

Question 133

83. An auditor of a nonpublic company should disclose the substantive reasons for ex pressing an adverse opinion in a basis for modifi cation paragraph a. Preceding the auditor’s responsibility section b. Preceding the opinion section. c. Following the opinion section. d. Within the notes to the fi nancial statements

Answer 133

83. (b) The requirement is to determine the proper placement of a basis for modifi cation paragraph disclosing the substantive reasons for expressing an adverse opinion. AU-C 705 requires that such paragraphs precede the opinion section (paragraph).

Question 134

84. When an auditor reports on fi nancial statements pre pared on an entity’s income tax basis, the auditor’s report should a. Disclaim an opinion on whether the statements were ex amined in accordance with generally ac cepted au diting standards. b. Not express an opinion on whether the statements are presented in conformity with the fi nancial re porting framework used. c. Include an explanation of how the results of operations differ from the cash receipts and disburse ments basis of accounting. d. State that the basis of presentation is a fi nancial re port ing framework other than GAAP.

Answer 134

84. (d) The requirement is to determine the information that should be included in an audit report on fi nancial statements prepared on the income tax basis of accounting. AU-C 800 pre sents the form of the report to be issued. Answer (d) is correct because AU-C 800 requires that the report indicate that the in come tax basis of accounting is a fi nancial report ing framework other than GAAP

Question 135

85. Helpful Co., a nonprofi t entity, prepared its fi nancial state ments on an accounting basis prescribed by a regulatory agency solely for fi ling with that agency. Green audited the fi nancial statements in accordance with generally accepted auditing stan dards and concluded that the fi nancial state ments were fairly presented on the prescribed basis. Green should issue a report with a(n) a. Qualifi ed opinion. b. Adverse opinion c. Disclaimer of opinion. d. Unmodifi ed opinion.

Answer 135

85. (d) The requirement is to identify the appropriate type of audit report to be issued for a nonprofi t entity’s fi - nancial statements prepared following an accounting basis prescribed by a regulatory agency solely for fi ling with that agency. Answer (d) is correct because an unmodifi ed opinion is appropriate given that the fi nancial statements are fairly presented; the report will include a paragraph indicat ing that a basis other than GAAP is being followed. An swer (a) is incorrect because an unmodifi ed report may be issued if there are no departures from the pre scribed basis. The report would not be qualifi ed because the fi nancial statements were prepared using an accounting basis pre scribed by a regulatory agency. Answer (b) is incorrect be cause an adverse opinion is not appropriate when the infor mation is properly presented. Answer (c) is incorrect be cause a disclaimer of opinion need not be issued.

Question 136

86. An auditor’s report on fi nancial statements pre pared in conformity with the cash basis of accounting should include a separate emphasis-of-matter paragraph that a. Justifi es the reasons for departing from generally ac cepted accounting principles. b. States whether the fi nancial statements are fairly pre sented in conformity with GAAP. c. Refers to the note to the fi nancial statements that de scribes the basis of accounting. d. Explains how the results of operations differ from fi nan cial statements prepared in conformity with gener ally accepted accounting principles.

Answer 136

86. (c) The requirement is to identify the disclosure in cluded in a separat e emphasis-of-matter paragraph of an auditor’s report on fi nancial statements prepared in con formity with the cash basis of accounting. Answer (c) is correct because the em phasis-of-matter paragraph refers to the note to the fi nancial statements that describes the basis of accounting. AU-C 800 presents complete details on such re ports. Answer (a) is incor rect because the report need not justify the reasons for following a basis other than generally ac cepted accounting principles. An swer (b) is incorrect be cause the emphasis-of-matter paragraph contains no statement on fair presentation, and because the opinion paragraph states whether the presentation is in con formity with the basis de scribed in the appropriate fi nancial statement note. An swer (d) is incorrect because no explanation of how the re sults of operations differ from fi nancial statements pre pared in conformity with generally accepted accounting prin ciples is necessary.

Question 137

87. An auditor’s report would refer to a basis of accounting other than GAAP in which of the following situations? a. Interim fi nancial information of a publicly held company that is subject to a limited review. b. Compliance with aspects of regulatory require ments re lated to audited fi nancial statements. c. Application of accounting principles to specifi ed trans actions. d. Limited use prospective fi nancial statements such as a fi nancial projection

Answer 137

87. (b) The requirement is to identify a situation in which an auditor’s report would refer to a basis of account ing other than GAAP AU-C 800 defi nes reports on compli ance with aspects of regulatory requirements related to au dited fi nancial statements as special-purpose fi nancial reporting frameworks and requires such identifi cation

Question 138

88. Delta Life Insurance Co. prepares its fi nancial state ments on an accounting basis insurance companies use pur suant to the rules of a state insurance commission. If Wall, CPA, Delta’s audi tor, discovers that the statements are not suitably titled, Wall should a. Disclose any reservations in an emphasis-of-matter para graph and qualify the opinion. b. Apply to the state insurance commission for an ad vi sory opinion. c. Issue a special statutory basis report that clearly dis claims any opinion. d. Explain in the notes to the fi nancial statements the ter minology used.

Answer 138

88. (a) The requirement is to determine the type of re port to issue when a client who uses a special-purpose fi nan cial re porting framework has not appropriately titled its fi nancial state ments. Answer (a) is correct because any such exceptions or reservation should be described in an emphasis-of-matter para graph and possibly a qualifi ed (or adverse) opinion should be is sued. Answer (b) is incorrect because no such application to the state insurance commission is necessary. Answer (c) is incorrect because a disclaimer of opinion is not appropriate when known misstatements exist. Answer (d) is incorrect because, as indi cated, more than describing the terminology is necessary.

Question 139

89. Financial information is presented in a printed form that prescribes the wording of the independent auditor’s report. The form is not acceptable to the auditor because the form calls for statements that are inconsistent with the au ditor’s responsibility. Under these circumstances, the audi tor most likely would a. Withdraw from the engagement. b. Reword the form or attach a separate report. c. Express a qualifi ed opinion with an explanation. d. Limit distribution of the report to the party who de signed the form.

Answer 139

89. (b) The requirement is to identify an auditor’s reporting responsibility when a printed form prescribes the wording of the independent auditor’s report that will accom pany it, but that wording is not acceptable to the auditor. AU-C 800 suggests that the auditor reword the report (or attach a separate report) in this situation.

Question 140

90. Field is an employee of Gold Enterprises. Hardy, CPA, is asked to express an opinion on Field’s profi t participation in Gold’s net income. Hardy may accept this engagement only if a. Hardy also audits Gold’s complete fi nancial state ments. b. Gold’s fi nancial statements are prepared in confor m ity with GAAP. c. Hardy’s report is available for distribution to Gold’s other employees. d. Field owns controlling interest in Gold.

Answer 140

90. (a) The requirement is to identify a requirement for a CPA to express an opinion on a profi t participation plan relating to an entity’s net income. Answer (a) is correct because if a specifi ed element is, or is based upon, an entity’s net income or stockholders’ equity, the CPA should have audited the complete fi nancial statements in order to express an opinion on the ele ment. Answer (b) is incorrect because the fi nancial statements need not be prepared in conformity with GAAP, as other bases of accounting may be followed. Answer (c) is incorrect because the report need not be made available for distribution to other em ployees. Answer (d) is incorrect because the individual in the profi t participation plan need not own a controlling interest in the company.

Question 141

``` 91. A CPA is permitted to accept a separate engagement (not in conjunction with an audit of fi nancial statements) to audit an entity’s Schedule of accounts receivable Schedule of royalties a. Yes Yes b. Yes No c. No Yes d. No No ```

Answer 141

91. (a) The requirement is to determine whether a CPA is permitted to accept an engagement to audit either a schedule of accounts receivable, a schedule of royalties, or both. Answer (a) is correct because auditors may audit “specifi ed elements, ac counts or items of a fi nancial statement,” in cluding either a schedule of accounts receivable or a schedule of royalties. An swer (b) is incorrect because an auditor may audit a schedule of royalties. Answer (c) is incorrect because an auditor may audit a schedule of accounts receivable. Answer (d) is incorrect because an auditor may audit both a schedule of accounts receivable and a schedule of royalties.

Question 142

92. In an accountant’s review of interim fi nancial information, the accountant typically performs each of the following, except a. Reading the available minutes of the latest stockholders’ meeting. b. Applying fi nancial ratios to the interim fi nancial information. c. Inquiring of the accounting department’s management. d. Confi rming major receivable accounts.

Answer 142

92. (d) The requirement is to identify the procedure not ordinarily included in an accountant’s review of interim fi nancial information. Answer (d) is correct because reviews consist largely of inquiries of management and analytical procedures and not corroborating external evidence such as confi rmations. An swer (a) is incorrect because the reading of minutes is ordinarily a part of a review. Answer (b) is incorrect because “applying fi nancial ratios” is a form of analytical procedures that may be included in a review. Answer (c) is incorrect because inquiries of accounting department management personnel are appropriate in a review.

Question 143

93. When an independent CPA has reviewed the interim fi nan cial statements of a public client, which procedure is least likely to have been performed? a. Obtaining written representations from manage ment for all interim fi nancial information pre sented. b. Observing the interim count of inventory. c. Reading the fi nancial statements for obvious ma te rial misstatements. d. Performing analytical procedures related to sales.

Answer 143

93. (b) The requirement is to identify the least likely procedure included in an interim review of the fi nancial statements of a public client. Answer (b) is correct because an interim review ordinarily does not include such substan tive tests of balances. Answer (a) is incorrect because a CPA should obtain such writ ten representations. Answer (c) is incorrect because the CPA will read the fi nancial state ments for obvious material misstate ments. Answer (d) is in correct because the primary procedures included in such a review are analytical procedures and inquiries.

Question 144

94. The objective of a review of interim fi nancial informa tion of a public entity (issuer) is to provide an accountant with a basis for reporting whether a. Material modifi cations should be made to conform with generally accepted accounting principles. b. A reasonable basis exists for expressing an updated opinion regarding the fi nancial statements that were previously audited. c. Summary fi nancial statements or pro forma fi nan cial in formation should be included in a registra tion statement. d. The fi nancial statements are presented fairly in ac cordance with generally accepted accounting prin ciples.

Answer 144

94. (a) The requirement is to identify the objective of a review of interim fi nancial information. Answer (a) is correct because the objective of a review of interim fi nancial information is to provide a basis for re porting on whether material modifi ca tion should be made for such information to conform with gen erally accepted ac counting principles. Answer (b) is incorrect because no updated opinion is being issued. Answer (c) is incor rect because summary fi nancial statements or pro forma fi nancial infor mation are not being considered in this question. An swer (d) is incorrect because the statements may or may not be presented in conformity with generally accepted ac counting principles

Question 145

95. An independent accountant’s report is based on a re view of interim fi nancial information. If this report is pre sented in a reg istration statement, a prospectus should in clude a statement clar ifying that the a. Accountant’s review report is not a part of the reg istration statement within the meaning of the Se cu rities Act of 1933. b. Accountant assumes no responsibility to update the re port for events and circumstances occurring after the date of the report. c. Accountant’s review was performed in accordance with standards established by the Securities and Exchange Commission. d. Accountant obtained corroborating evidence to de termine whether material modifi cations are needed for such information to conform with GAAP.

Answer 145

95. (a) The requirement is to identify the correct state ment with respect to an independent accountant’s review report on interim fi nancial information presented in a regis tration state ment. Answer (a) is correct because an accoun tant’s review re port is not a part of the registration statement within the meaning of Section 11 of the Securities Act of 1933. Answer (b) is incor rect because under certain condi tions an accountant is required to update the report. An swers (c) and (d) are incorrect because the prospectus in cludes neither a statement that the review was performed in accordance with SEC standards, nor a statement that the accountant obtained corroborating evidence.

Question 146

96. A modifi cation of the CPA’s report on a review of the in terim fi nancial statements of a publicly held company would be necessitated by which of the following? a. An uncertainty. b. Lack of consistency. c. Reference to another accountant. d. Inadequate disclosure.

Answer 146

96. (d) The requirement is to determine the circum stances which will lead to a modifi cation of an interim re port. Departures from generally accepted accounting princi ples, which in clude adequate disclosure, require modifi ca tion of the account ant’s report. Normally neither an uncertainty [answer (a)] nor a lack of consistency [an swer (b)] would cause a report modifi ca tion. Reference to another accoun tant [answer (c)] is not con sidered a modifi cation.

Question 147

97. Which of the following procedures ordinarily should be applied when an independent accountant conducts a review of interim fi nancial information of a publicly held entity? a. Verify changes in key account balances. b. Read the minutes of the board of directors’ meet ings. c. Inspect the open purchase order fi le. d. Perform cut-off tests for cash receipts and dis bursements.

Answer 147

97. (b) The requirement is to identify the procedure that would ordinarily be applied when an accountant conducts a re view of the interim fi nancial information of a publicly held entity. Answer (b) is correct because the accountant will ordinarily read the minutes of meetings of stockholders, the board of directors, and committees of the board of directors to identify actions that may affect the interim fi nancial in formation. An swers (a), (c), and (d) are all incorrect be cause they represent verifi cation pro cedures typically be yond the scope of a re view of interim fi nan cial information

Question 148

98. Which of the following is least likely to be a procedure in cluded in an accountant’s review of interim fi nancial in formation of a public entity? a. Compare disaggregated revenue data by month to that of the previous interim period. b. Read available minutes of meetings of stockhold ers. c. Observe counting of physical inventory. d. Inquire of management concerning signifi cant jour nal entries and other adjustments.

Answer 148

98. (c) The requirement is to identify the least likely proce dure to be included in an accountant’s review of inte rim fi nancial information of an issuer (public) entity. An swer (c) is correct because a review consists principally of performing analytical procedures and making inquiries, not procedures such as obser vation, inspection, and confi rmation. Answers (a), (b), and (d) are all incorrect because they include review procedures included in the professional standards

Question 149

99. An accountant’s review report on interim fi nancial in formation of a public entity is most likely to include a a. Statement that the interim fi nancial information was ex amined in accordance with standards of the Public Company Accounting Oversight Board. b. Statement that the interim fi nancial information is the re sponsibility of the entity’s shareholders. c. Description of the procedures for a review. d. Statement that a review of interim fi nancial in for mation is less in scope than a compilation con ducted in accordance with AICPA standards

Answer 149

99. (c) The requirement is to identify the most likely information included in a review report. Answer (c) is cor rect be cause the professional standards require that the re port include a de scription of procedures performed. Answer (a) is incorrect because the information was reviewed, not examined, in accord ance with standards of the PCAOB. Answer (b) is incorrect because the interim fi nancial infor mation is the responsibility of the entity’s management, not the shareholders. Answer (d) is incorrect because a review is less in scope than an audit, not than a compilation.

Question 150

100. An auditor may report on summary fi nancial state ments that are derived from complete fi nancial statements if the a. Summary fi nancial statements are distributed to stock holders along with the complete fi nancial statements. b. Auditor described the additional procedures performed on the summary fi nancial statements. c. Auditor indicates whether the information in the sum mary fi nancial statements is fairly stated in all material respects in relation to the complete fi nan cial state ments from which it has been derived. d. Summary fi nancial statements are presented in compara tive form with the prior year’s summary fi nancial statements.

Answer 150

100. (c) The requirement is to determine the circumstance under which an auditor may report on summary fi nancial state ments that are derived from complete audited fi nancial state ments. Answer (c) is correct because a report may be issued when the information in the summary fi nan cial statements is fairly stated in all material respects in rela tion to the fi nancial statements. Answer (a) is incorrect because the summary fi nan cial statements need not be dis trib uted with the complete fi nan cial statements. Answer (b) is incorrect because the report need not indicate the na ture of any additional procedures. Answer (d) is incorrect because prior year summary fi nancial information is not necessary. See AU-C 810 for information on summary fi nan cial state ments.

Question 151

101. An auditor is engaged to report on selected fi nancial data that are included in a document con taining audited fi nancial statements. Under these circum stances, the report on the selected data should a. Be limited to data derived from the audited fi nan cial statements. b. Be distributed only to senior management and the board of directors. c. State that the presentation is a fi nancial reporting frame work other than GAAP. d. Indicate that the data are not fairly stated in all ma terial respects.

Answer 151

101. (a) The requirement is to determine the appropriate response relating to selected fi nancial data that are included in a document containing audited fi nancial statements. An swer (a) is correct because the selected data should be lim ited to data de rived from the audited fi nancial statements. Answer (b) is incor rect because distribution of the report need not be limited to senior management and the board of directors. Answer (c) is incorrect because the se lected data need not follow a fi nancial reporting framework other than GAAP. Answer (d) is incorrect because the report will ordinarily state that the selected data are fairly stated in all mate rial respects in relation to the consolidated fi nancial state ments.

Question 152

102. A registration statement fi led with the SEC contains the reports of two independent auditors on their audits of fi nancial statements for different periods. The predecessor auditor who audited the prior period fi nancial statements generally should obtain a letter of representation from the a. Successor independent auditor. b. Client’s audit committee. c. Principal underwriter. d. Securities and Exchange Commission.

Answer 152

102. (a) The requirement is to determine a predecessor auditor’s responsibility when the fi nancial statements he or she au dited are being included in an SEC registration state ment fi ling. Answer (a) is correct because AU-C 920 requires that the prede cessor (1) read pertinent portions of the document, and (2) ob tain a letter of representation from the suc cessor auditor.

Question 153

103. Which of the following statements is correct concerning letters for underwriters, commonly referred to as comfort letters? a. Letters for underwriters are required by the Securi ties Act of 1933 for the initial public sale of regis tered secu rities. b. Letters for underwriters typically give negative as surance on unaudited interim fi nancial information. c. Letters for underwriters usually are included in the regis tration statement accompanying a prospectus. d. Letters for underwriters ordinarily update auditors’ opinions on the prior year’s fi nancial statements

Answer 153

103. (b) The requirement is to identify the statement that is correct concerning letters for underwriters. Answer (b) is correct because letters for underwriters typically provide negative assur ance on unaudited interim fi nancial information. Answer (a) is incorrect because letters for underwriters are not required by the Securities Act of 1933. Answer (c) is incorrect because letters for underwriters are not included in registrations statements. An swer (d) is incorrect because auditors’ opinions on the prior year’s fi nancial statement are not updated.

Question 154

104. Comfort letters ordinarily are signed by the client’s a. Independent auditor. b. Underwriter of securities. c. Audit committee. d. Senior management.

Answer 154

104. (a) The requirement is to determine who ordinarily signs a comfort letter. Answer (a) is correct because a com fort letter (also known as letter to an underwriter) is sent by the inde pendent auditor to the underwriter.

Question 155

105. Comfort letters ordinarily are addressed to a. Creditor fi nancial institutions. b. The client’s audit committee. c. The Securities and Exchange Commission. d. Underwriters of securities

Answer 155

105. (d) The requirement is to identify to whom comfort letters are ordinarily addressed. Answer (d) is correct be cause comfort letters, also referred to as letters for under writers, are ordinarily addressed to underwriters

Question 156

106. When an accountant issues to an underwriter a comfort letter containing comments on data that have not been au dited, the underwriter most likely will receive a. Negative assurance on capsule information. b. Positive assurance on supplementary disclosures. c. A limited opinion on pro forma fi nancial state ments. d. A disclaimer on prospective fi nancial statements

Answer 156

106. (a) The requirement is to determine the type of opin ion or assurance provided by an accountant who issues a comfort letter containing comments on data that have not been audited. Answer (a) is correct because when proce dures short of an audit are applied to information such as capsule information, a comfort letter will generally provide negative assurance. Answer (b) is incorrect because CPAs do not provide positive assurance on supplementary disclo sures. Answer (c) is incorrect because no “limited opinion” is issued on pro forma or other information. Answer (d) is incorrect because no disclaimer will be included on the prospective fi nancial statements.

Question 157

107. When an independent audit report is incorporated by refer ence in a SEC registration statement, a prospectus that includes a statement about the independent accountant’s involvement should refer to the independent accountant as a. Auditor of the fi nancial reports. b. Management’s designate before the SEC. c. Certifi ed preparer of the report. d. Expert in auditing and accounting.

Answer 157

107. (d) The requirement is to determine the appropriate reference to an independent accountant in a prospectus (re lating to an SEC registration statement) that includes a statement about his/her involvement with an independent audit report. AU-C 920 indicates that the independent ac countant is an expert in auditing and accounting.

Question 158

108. Which of the following matters is covered in a typical com fort letter? a. Negative assurance concerning whether the entity’s in ternal control procedures operated as designed during the period being audited. b. An opinion regarding whether the entity complied with laws and regulations under Government Auditing Standards and the Single Audit Act of 1984. c. Positive assurance concerning whether unaudited condensed fi nancial information complied with generally accepted accounting principles. d. An opinion as to whether the audited fi nancial statements comply in form with the accounting re quirements of the SEC.

Answer 158

108. (d) The requirement is to identify the information in cluded in a typical comfort letter. Answer (d) is correct because in a comfort letter auditors provide an opinion as to whether the audited fi nancial statements comply in form with the accounting requirements of the SEC. Answer (a) is incorrect because nega tive assurance concerning whether the entity’s internal control procedures operated as designed during the period is not pro vided. Answer (b) is incorrect because a comfort letter does not include an opinion on whether the entity complied with Gov ernment Auditing Standards and the Single Audit Act. An swer (c) is incorrect because negative, not positive, assurance is provided on unaudited summary fi nancial information.

Question 159

109. When unaudited fi nancial statements are presented in comparative form with audited fi nancial statements in a document fi led with the Securities and Exchange Commis sion, such statements should be Marked as “unaudited” Withheld until audited Referred to in the auditor’s report a. Yes No No b. Yes No Yes c. No Yes Yes d. No Yes No

Answer 159

109. (a) The requirement is to determine the proper treatment of unaudited fi nancial statements presented in comparative form with audited fi nancial statements in a document fi led with the Securities and Exchange Commission. An swer (a) is correct because those statements should be marked “unaudited,” not withheld until they are audited, and not referred to in the audi tor’s report.

Question 160

110. In connection with a proposal to obtain a new audit client, a CPA in public practice is asked to prepare a report on the appli cation of accounting principles to a specific transaction. The CPA’s report should include a statement that a. The engagement was performed in accordance with Statements on Standards for Accounting and Review Services. b. Responsibility for the proper accounting treatment rests with the preparers of the fi nancial statements. c. The evaluation of the application of accounting prin ci ples is hypothetical and may not be used for opinion-shopping. d. The guidance is provided for management’s use only and may not be communicated to the prior or continuing auditor.

Answer 160

110. (b) The requirement is to identify the requirement relat ing to a CPA’s report when reporting on the application of ac counting principles to a specific transaction. An swer (b) is cor rect because AU-C 915 requires that the report include a statement that responsibility for the proper ac counting treatment rests with the preparers of the fi nancial statements. Answer (a) is incorrect because the report states that the engagement was per formed in accordance with ap plicable AICPA standards, not Statements on Standards for Accounting and Review Services. Answer (c) is incorrect as no such statement about opinion-shopping is included. An swer (d) is incorrect because the infor mation may be com municated to a prior or continuing auditor.

Question 161

111. In connection with a proposal to obtain a new client, an accountant in public practice is asked to prepare a written report on the application of accounting principles to a spe cifi c transac tion. The accountant’s report should include a statement that a. Any difference in the facts, circumstances, or as sumptions presented may change the report. b. The engagement was performed in accordance with Statements on Standards for Consulting Ser vices. c. The guidance provided is for management use only and may not be communicated to the prior or con tinuing auditors. d. Nothing came to the accountant’s attention that caused the accountant to believe that the account ing principles violated GAAP

Answer 161

111. (a) The requirement is to determine an auditor’s report ing responsibility when asked by a prospective client to render an opinion on the application of accounting principles to a specifi c transaction. Answer (a) is correct be cause AU-C 915 indicates that the report must include a state ment that any difference in the facts, circumstances, or as sumptions presented may change the report, as well as vari ous other disclosures. Answer (b) is incor rect because the report indicates that the engagement was per formed in ac cordance with AICPA standards, not Statements on Standards for Consulting Services. Answer (c) is incorrect be cause the report need not indicate that the guidance is for man agement use only and may not be communicated to the prior or continuing auditors. Answer (d) is incorrect because the report does not include negative assurance (“nothing came to our atten tion”). See AU-C 915 for performance and reporting require ments relating to reports on the application of accounting princi ples.

Question 162

112. Blue, CPA, has been asked to render an opinion on the application of accounting principles to a specifi c transaction by an entity that is audited by another CPA. Blue, who previously has provided no services to the entity, may ac cept this engagement, but should a. Consult with the continuing CPA to obtain in formation relevant to the transaction. b. Report the engagement’s fi ndings to the entity’s au dit committee, the continuing CPA, and man agement. c. Disclaim any opinion that the hypothetical application of accounting principles conforms with gener ally ac cepted accounting principles. d. Notify the entity that the report is for the restricted use of management and outside parties who are aware of all relevant facts.

Answer 162

112. (a) The requirement is to determine an auditor’s respon sibility when asked to render an opinion on the applica tion of accounting principles to a specifi c transaction by an entity that is audited by another CPA. Answer (a) is correct because the accountant ordinarily must consult with the continuing CPA to attempt to obtain information relevant to the trans action; an exception to this rule exists under certain circumstances in which the accountant provides recurring services for the entity. Answer (b) is incorrect because the engagement’s fi ndings need not be re ported to all of the groups listed—the entity’s audit committee, the continuing CPA, and manage ment. Answer (c) is incorrect because the accountant need not disclaim an opinion. An swer (d) is incorrect because the report’s distribution need not be restricted to management and outside parties who are aware of all relevant facts.

Question 163

113. Which of the following statements is not included in an accountant’s report on the application of accounting principles? a. The engagement was performed following stan d ards es tablished by the American Institute of Cer ti fi ed Pub lic Accountants. b. The report is based on a hypothetical transaction not involving facts or circumstances of this particular en tity. c. The report is intended solely for the information and use of specifi ed parties. d. Responsibility for the proper accounting treatment rests with the preparers of the fi nancial statements.

Answer 163

113. (b) Answer (b) is correct because AU-C 915 indicates that an accountant should not undertake such an engagement when the report would be based on such a hypothetical transac tion. Answers (a), (c), and (d) are all incorrect be cause they include information included in an accountant’s report on the application of accounting principles.

Question 164

114. Which of the following services would be most likely to be structured as an attest engagement in which assurance is provided? a. Advocating a client’s position in tax matter. b. A consulting engagement to develop a new data base sys tem for the revenue cycle. c. An engagement to issue a report addressing an entity’s compliance with requirements of specifi ed laws. d. The compilation of a client’s forecast information.

Answer 164

114. (c) The requirement is to select the service that is most likely to be structured as an attest engagement. An swer (c) is correct because CPAs may provide assurance as to compliance with requirements of specifi ed laws through a variety of services, including agreed-upon procedures en gagements and various compliance audits. Answers (a) and (b) are incorrect because advocating a client’s tax posi tion is not typically structured as an attest service. Answer (d) is incorrect because compilation reports do not provide assurance

Question 165

115. An unmodifi ed attestation report ordinarily may refer to a. Only the assertion. b. Only the subject matter to which the assertion re lates. c. Either the assertion or the subject matter to which the as sertion relates. d. Neither the assertion nor the subject matter to which the assertion relates.

Answer 165

115. (c) Answer (c) is correct because AT 101 indicates that an unmodifi ed may ordinarily refer to that assertion or to the subject matter to which the assertion relates. Answer (a) is in correct because it suggests reporting only on the assertion. An swer (b) is incorrect because it suggests re porting only on the subject matter. Answer (d) is incorrect because it suggests that reporting on neither the assertion nor the subject matter is ap propriate. Note, however, that AT 101 also states that when a deviation from the criteria being reported upon exits (e.g., a ma terial weakness in internal control” the CPA should report di rectly upon the subject matter and not upon the assertion.

Question 166

``` 116. A practitioner is issuing a standard unmodifi ed examination report under the attestation standards. The CPA’s conclusion may be on Subject matter Management’s written assertion a. Yes Yes b. Yes No c. No Yes d. No No ```

Answer 166

116. (a) The requirement is to identify the correct statement. When a standard unmodifi ed examination report is being issued, that report may be upon the subject matter or the written asser tion. Answers (b), (c), and (d) are all incor rect because they suggest that the report may not be upon either the subject matter, the written assertion, or both.

Question 167

117. Conditions exist that result in a material deviation from the criteria against which the subject matter was evaluated during an examination. The CPA’s conclusion may be on Subject matter Written assertion a. Yes Yes b. Yes No c. No Yes d. No No

Answer 167

117. (b) The requirement is to determine whether a CPA’s conclusion may be upon the subject matter, the written assertion, or both when conditions exist that result in a material deviation from the criteria against which the subject matter was evaluated during an examination. Answer (b) is correct because in such circumstances the conclusion should be directly upon the subject matter. Answer (a) is incorrect because it suggests that the con clusion may be upon the written assertion. Answer (c) is incor rect because it states that the conclusion may not be upon the subject matter and may be upon the written assertion. Answer (d) is incorrect because it states that the conclusion may not be upon the subject matter.

Question 168

118. When performing an attestation engagement, which of the following is least likely to be present? a. Practitioner’s written assertion. b. Responsible party. c. Subject matter. d. Suitable criteria.

Answer 168

118. (a) The requirement is to determine the element that is least likely to be present when a practitioner performs an attest engagement. Answer (a) is correct because while an assertion is generally present, it is from the responsible party, not from the practitioner. Answer (b) is incorrect because ordinarily there is a responsible party. Answers (c) and (d) are incorrect because both subject matter, and suitable crite ria are required.

Question 169

119. Suitable criteria in an attestation engagement may be avail able Publicly In CPA’s report a. Yes Yes b. Yes No c. No Yes d. No No

Answer 169

119. (a) The requirement is to determine whether suitable criteria in an attestation engagement may be available publicly, and/or in the CPA’s report. Answer (a) is correct be cause suit able criteria may be available publicly in the CPA’s report, in cluded with the subject matter or in the as sertion, well under stood by users (e.g., the distance between A and B is twenty feet) or available only to specifi ed parties. Answers (b), (c), and (d) are all incorrect because they sug gest that suitable criteria may not be available publicly, in the CPA’s report, or both.

Question 170

120. Which of the following is least likely to be included in an agreed-upon procedures attestation engagement report? a. The specifi ed party takes responsibility for the suffi - ciency of procedures. b. Use of the report is restricted. c. Limited assurance on the information presented. d. A summary of procedures performed.

Answer 170

120. (c) The requirement is to identify the information that is least likely to be included in an agreed-upon proce dures attes tation report. Answer (c) is correct because an agreed-upon procedures report provides a summary of procedures performed and fi ndings, not limited assurance. An swer (a) is incorrect be cause the specifi ed party does not take responsibility for the suffi ciency of procedures. An swer (b) is incorrect because the re port’s use is restricted. Answer (d) is incorrect because a summary of procedures performed is included

Question 171

``` 121. A summary of fi ndings rather than assurance is most likely to be included in a. Agreed-upon procedures report. b. Compilation report. c. Examination report. d. Review report. ```

Answer 171

121. (a) The requirement is to identify the type of report that is most likely to include a summary of fi ndings rather than assur ance. Answer (a) is correct because agreed-upon procedures reports include a summary of fi ndings. An swer (b) is incorrect because a compilation report does not provide a summary of fi ndings. Answer (c) is incorrect be cause an examination report includes positive assurance and not a summary of fi ndings. An swer (d) is incorrect because a review report includes limited (negative) assurance, not a summary of fi ndings.

Question 172

122. Which of the following is not correct concerning “specifi ed parties” of an agreed-upon procedures report un der either the auditing or attestation standards? a. They must agree on the procedures to be per formed. b. They must take responsibility for the adequacy of the procedures performed. c. They must sign an engagement letter. d. After completion of the engagement, another party may be added as a specifi ed user.

Answer 172

122. (c) The requirement is to identify the statement that is not correct concerning “specifi ed parties” of an agreed-upon procedures report under either the auditing or attesta tion standards. Answer (c) is correct because while a practi tioner should establish a clear understanding regarding the terms of the engagement, preferably in an engagement letter, no such engagement letter is required. Answers (a) and (b) are incorrect because the specifi ed parties must agree on the procedures to be performed and take responsibility for their adequacy. Answer (d) is incorrect because an additional party may be added as a specifi ed party after completion of the engagement

Question 173

123. When an accountant examines projected fi nancial statements, the accountant’s report should include a separate paragraph that a. Describes the limitations on the usefulness of the presen tation. b. Provides an explanation of the differences between an examination and an audit. c. States that the accountant is responsible for events and circumstances up to one year after the report’s date. d. Disclaims an opinion on whether the assumptions pro vide a reasonable basis for the projection.

Answer 173

123. (a) The requirement is to determine the information to be included in a separate paragraph included in an ac countant’s report on the examination of projected fi nancial statements. Answer (a) is correct because AT 301 requires that such a report include a separate paragraph that describes the limitations on the usefulness of the presentation. See AT 301 for information that should be included in an examination report of prospective fi nancial statements. An swer (b) is incorrect because the report includes no such statement attempting to distinguish between an examination and an audit. Answer (c) is incorrect because the report includes no such disclosure and because the accountant is not responsible for events and circumstances up to one year after the report’s date. Answer (d) is incorrect because the report suggests that the assumptions do provide a reasonable basis.

Question 174

124. An accountant may accept an engagement to apply agreed-upon procedures to prospective fi nancial statements provided that a. Use of the report is restricted to the specifi ed par ties. b. The prospective fi nancial statements are also ex amined. c. Responsibility for the adequacy of the procedures per formed is taken by the accountant. d. Negative assurance is expressed on the prospective fi - nancial statements taken as a whole.

Answer 174

124. (a) The requirement is to identify the circumstance in which an accountant may accept an engagement to apply agreed-upon procedures to prospective fi nancial statements. Answer (a) is correct because AT 301 states that an accountant may accept an engagement to apply agreed-upon procedures to prospective fi nancial statements provided that (1) the specifi ed parties involved have participated in establish ing the nature and scope of the engagement and take respon sibility for the adequacy of the procedures to be performed, (2) use of the report is to be re stricted to specifi ed parties involved, and (3) the prospective fi nancial statements in clude a summary of signifi cant assump tions. Answer (b) is incorrect because the prospective fi nancial statements need not be examined. Answer (c) is incorrect be cause responsi bility for the adequacy of the procedures is taken by the spe cifi ed parties. Answer (d) is incorrect because a sum mary of fi ndings may be provided based on the agreed-upon proce dures.

Question 175

125. An accountant’s compilation report on a fi nancial forecast should include a statement that a. The forecast should be read only in conjunction with the audited historical fi nancial statements. b. The accountant expresses only limited assurance on the forecasted statements and their assumptions. c. There will usually be differences between the forecasted and actual results. d. The hypothetical assumptions used in the forecast are reasonable in the circumstances.

Answer 175

125. (c) The requirement is to identify the statement which should be included in an accountant’s compilation report on fi nancial forecasts. Answer (c) is correct because when the ac countant is preparing a standard compilation report on prospec tive fi nancial statements, AT 301 requires that the accountant include a statement indicating that the prospective results may not be achieved

Question 176

126. Accepting an engagement to examine an entity’s fi - nancial projection most likely would be appropriate if the projection were to be distributed to a. All employees who work for the entity. b. Potential stockholders who request a prospectus or a registration statement. c. A bank with which the entity is negotiating for a loan. d. All stockholders of record as of the report date.

Answer 176

126. (c) The requirement is to identify the appropriate distri bution of an entity’s fi nancial projection. A fi nancial projection is sometimes prepared to present one or more hypothetical courses of action for evaluation in response to a question such as “What would happen if...?” It is based on a responsible party’s assump tions refl ecting conditions it ex pects would exist and the course of action it expects would be taken, given one or more hypothet ical assumptions. Pro jections are “limited use” fi nancial state ments meant for the responsible party (generally management) and third parties with whom the responsible party is negotiating directly. Answer (c) is correct because a bank might be expected to receive such a projection. Answers (a), (b), and (d) are all incorrect because projections are meant for “limited use” and not to be broadly distributed to groups such as all em ployees or po tential or current stockholders. AT 301 pro vides overall guid ance on the area of fi nancial forecasts and projections.

Question 177

127. A CPA in public practice is required to comply with the provisions of the Statements on Standards for Attestation Engagements (SSAE) when Testifying as an expert witness in accounting and auditing matters given stipulated facts Compiling a client’s fi nancial projection that presents a hypothetical course of action a. Yes Yes b. Yes No c. No Yes d. No No

Answer 177

127. (c) The requirement is to determine whether either testifying as an expert witness, compiling a fi nancial projection, or both are engagements governed by the provisions of the Statement on Standards for Attestation Statements. Answer (c) is correct because the attestation standards expli citly exclude expert witness work, but include the compila tion of a fi nancial projection; note that in most areas compi lations are not included in attestation standard cover age, but in the area of prospective fi nancial statement (fore casts as well as projections) coverage is included. Answer (a) is incorrect because it states that expert witness work is in cluded. Answer (b) is incorrect both because it states that expert witness work is included and that compiling a projec tion is not included. Answer (d) is incorrect because it states that compilations of projections are not included.

Question 178

128. An accountant’s compilation report on a fi nancial forecast should include a statement that the a. Compilation does not include evaluation of the support of the assumptions underlying the forecast. b. Hypothetical assumptions used in the forecast are reasonable. c. Range of assumptions selected is one in which one end of the range is less likely to occur than the other. d. Prospective statements are limited to presenting, in the form of a forecast, information that is the accountant’s representation.

Answer 178

128. (a) The requirement is to identify the statement that should be included in a compilation report on a fi nancial forecast. Answer (a) is correct because the report should state that the compilation does not include evaluation of the support of the assumptions underlying the forecast. An swer (b) is incorrect because no such statement is included in a compilation report, and because hypothetical assumptions pertain to fi nancial projec tions, not fi nancial forecasts. Answer (c) is incorrect because the report makes no state ment concerning the range of assumptions. Answer (d) is incorrect because the statement is not included in the report, and because the prospective statements are manage ment’s, not the accountant’s, representation.

Question 179

129. Which of the following is a prospective fi nancial statement for general use upon which an accountant may appropriately report? a. Financial projection. b. Partial presentation. c. Pro forma fi nancial statement. d. Financial forecast.

Answer 179

129. (d) The requirement is to identify the type of general use prospective fi nancial statement on which the accountant may appropriately report. Answer (d) is correct because fi nancial forecasts are considered prospective fi nancial statements, and they are appropriate for general use. An swer (a) is incorrect because fi nancial projections are only appropriate for the party responsible for preparing them or for third parties with whom the responsible party is negotiating directly. Answers (b) and (c) are incorrect because partial presentations and pro forma fi nancial statements are not considered prospective fi nancial statements.

Question 180

130. Which of the following is not included in a compila tion report on prospective fi nancial statements? a. A statement that the practitioner assumes no responsi bility to update the report for events and circumstances occurring after the date of the report. b. A caveat that the prospective results may not be achieved. c. A statement that a compilation is limited in scope and does not enable the practitioner to express an opinion or any other form of assurance on the information. d. Distribution of the report is restricted to speci fi ed parties.

Answer 180

130. (d) The requirement is to identify the statement that is not included in a compilation report on prospective fi nan cial statements. Answer (d) is correct because distribution of such a report is not necessarily restricted to specifi ed par ties. Answers (a), (b), and (c) are all incorrect because such statements are included in a compilation report.

Question 181

131. When an accountant examines a fi nancial forecast that fails to disclose several signifi cant assumptions used to pre pare the forecast, the accountant should describe the as sumptions in the accountant’s report and issue a(n) a. “Except for” qualifi ed opinion. b. “Subject to” qualifi ed opinion. c. Unmodifi ed opinion with a separate emphasis-of-matter paragraph. d. Adverse opinion.

Answer 181

131. (d) The requirement is to determine the appropriate type of audit report to be issued when an accountant ex amines a fi nancial forecast that fails to disclose several sig nifi cant assump tions used to prepare the forecast. AT 301 states that an adverse opinion is appropriate when signifi cant assumptions are not dis closed.

Question 182

132. An examination of a fi nancial forecast is a professional service that involves a. Compiling or assembling a fi nancial forecast that is based on management’s assumptions. b. Limiting the distribution of the accountant’s report to management and the board of directors. c. Assuming responsibility to update management on key events for one year after the report’s date. d. Evaluating the preparation of a fi nancial forecast and the support underlying management’s assumptions.

Answer 182

132 . (d) The requirement is to identify what is included in the examination of a fi nancial forecast. Answer (d) is correct because an examination of a forecast includes an evaluation of its preparation and the support underlying management’s assumptions. As discussed in AT 301, an examination also includes evaluating the representation of the prospective fi nancial statements for conformity with AICPA presentation guidelines and the issuance of an examination report. Answer (a) is incorrect because the service need not include the compiling or assembling of the fi nancial forecast. Answer (b) is incorrect because distribution of fi nancial forecasts need not be limited. Answer (c) is incorrect because the CPA assumes no responsibility to update management on key events. See AT 301 for information on prospective fi nancial information.

Question 183

133. Given one or more hypothetical assumptions, a responsible party may prepare, to the best of its knowledge and belief, an entity’s expected fi nancial position, results of operations, and changes in fi nancial position. Such prospec tive fi nancial state ments are known as a. Pro forma fi nancial statements. b. Financial projections. c. Partial presentations. d. Financial forecasts.

Answer 183

133. (b) The requirement is to identify the type of prospective fi nancial statement that includes one or more hypothetical (“what if?”) assumptions. Answer (b) is correct because fi nancial projections include one or more hy pothetical assumptions. An swer (a) is incorrect because pro forma fi nancial presentations are designed to demonstrate the ef fect of a future or hypothetical transaction by showing how it might have affected the historical fi nancial statements if it had been consummated during the pe riod covered by those statements. Answer (c) is incorrect because partial presen tations are presentations that do not meet the mini mum presentation guidelines of AT 301. Answer (d) is incorrect because fi nancial forecasts present, to the best of the responsible party’s knowledge and belief, an entity’s ex pected fi nancial position, results of operations, and changes in fi nan cial information.

Question 184

134. An accountant’s report on a review of pro forma fi nancial information should include a a. Statement that the entity’s internal control was not relied on in the review. b. Disclaimer of opinion on the fi nancial statements from which the pro forma fi nancial information is derived. c. Caveat that it is uncertain whether the transaction or event refl ected in the pro forma fi nancial infor mation will ever occur. d. Reference to the fi nancial statements from which the his torical fi nancial information is derived.

Answer 184

134. (d) The requirement is to determine the statement that should be included in an accountant’s report on a review of pro forma fi nancial information. Answer (d) is correct because the report must include a reference to the fi nancial statements from which the historical fi nancial information is derived and a state ment as to whether such fi nancial state ments were audited or reviewed.

Question 185

135. Which of the following is not an objective of a CPA’s exami nation of a client’s management discussion and analy sis (MD&A) prepared pursuant to Securities and Exchange Commission rules and regulations? a. The historical amounts have been accurately de rived, in all material respects, from the entity’s fi nancial statements. b. The presentation is in conformity with rules and reg ula tions adopted by the Securities and Ex change Commission. c. The underlying information, determinations, estimates and assumptions of the entity provide a reasonable ba sis for the disclosures contained herein. d. The presentation includes the required elements of MD&A.

Answer 185

135. (b) The requirement is to determine the reply that is not an objective of a CPA’s examination of a client’s MD&A. Answer (b) is correct because an examination of a client’s MD&A does not directly address overall conformity with such rules and regulations. Answers (a), (c), and (d) are the three objectives of an MD&A examination agree ment.

Question 186

136. Which of the following is an assertion embodied in manage ment’s discussion and analysis (MD&A)? a. Valuation. b. Reliability c. Consistency with the fi nancial statements. d. Rights and obligations.

Answer 186

136. (c) The requirement is to identify an assertion embod ied in MD&A. Answer (c) is correct because the attestation standards on MD&A indicate that consistency with the fi nancial statements is an assertion—in addition, occur rence, complete ness, and presentation and disclosure are embodied assertions. Answers (a), (b), and (d) are all incor rect because valuation, reliability, and rights and obligations are not considered to be assertions embodied in the MD&A.

Question 187

137. Which of the following statements is correct relating to an auditor’s review engagements on an entity’s manage ment discus sion and analysis (MD&A)? a. A review consists principally of applying analyti cal pro cedures and search and verifi cation proce dures. b. The review report of a public entity should be restricted to the use of specifi ed parties. c. No consideration of internal control is necessary. d. The report issued will ordinarily include a sum mary of fi ndings, but no negative assurance.

Answer 187

137. (b) Answer (b) is correct because the MD&A re view of an issuer (public) entity should be restricted to the use of specifi ed parties. Answer (a) is incorrect because a review consists principally of applying analytical proce dures, rather than also including search and verifi cation pro cedures. Answer (c) is incorrect because a consideration of relevant portion of internal control is necessary to identify types of potential misstatements and to select the inquiries and analytical procedures. Answer (d) is incorrect because a review report ordinarily provides negative assurance, not a summary of fi ndings.

Question 188

138. Trust Service engagements are performed under the provi sions of a. Statements on Assurance Standards. b. Statements on Standards for Attestation Engagements. c. Statements on Standards for Trust Engagements d. Statements on Auditing Standards

Answer 188

138. (b) The requirement is to identify the standards un der which Trust Services engagements are performed. An swer (b) is correct because the Statements on Standards for Attestation engagements address such engagements. More information on Trust Services engagements (WebTrust and SysTrust) is available on the AICPA’s website—www.aicpa.org. Answers (a) and (c) are incorrect because such standards do not exist. Answer (d) is incorrect because Statements on Auditing Standards do not address Trust Ser vices engagements.

Question 189

139. The WebTrust seal of assurance relates most directly to a. Financial statements maintained on the Internet. b. Health care facilities. c. Risk assurance procedures. d. Websites.

Answer 189

139. (d) The requirement is to identify what the Web Trust seal of assurance relates most directly to. Answer (d) is correct because the WebTrust seal is designed to provide assurance on website security, availability, processing in tegrity, online privacy and confi dentiality. Answers (a), (b), and (c) are all incorrect since WebTrust isn’t specially aimed at fi nancial statements, health care facilities, or risk assur ance procedures

Question 190

140. A CPA’s examination report relating to a WebTrust engagement is most likely to include a. An opinion on whether the site is “hackproof.” b. An opinion on whether the site meets the Web Trust cri teria. c. Negative assurance on whether the site is electronically secure. d. No opinion or other assurance, but a summary of fi ndings relating to the website.

Answer 190

140. (b) The requirement is to determine the type of opin ion or assurance most likely to be included in a CPA’s rep ort relating to WebTrust engagements. Answer (b) is cor rect because the WebTrust examination report provides an opinion on whether the site meets the Trust Services criteria for one or more of the Trust Services Principles. Answer (a) is incorrect because no opinion on being “hackproof” is issued. Answer (c) is incorrect because negative assurance is not provided. Answer (d) is incorrect because an agreed-upon procedures engagement, not an examination engage ment results in a summary of fi ndings.

Question 191

141. An engagement in which a CPA considers security, availability, processing integrity, online privacy, and/or con fi dentiality over any type of defi ned electronic system is most likely to considered which of the following types of engagements? a. Internal control over fi nancial reporting. b. SysTrust. c. Website Associate. d. WebTrust.

Answer 191

141. (b) The requirement is to identify the type of engagement that considers security, availability, processing integrity, online privacy and/or confi dentiality over any type of defi ned electronic system. Answer (b) is correct because SysTrust engagements consider any type of defi ned electronic system. Answer (a) is incorrect because an engage ment to consider internal control over fi nancial reporting does not directly address these attributes. Answer (c) is incorrect because there is no such en gagement as a website Associate. Answer (d) is incorrect because WebTrust deals more directly with company websites.

Question 192

142. A client’s refusal to provide a written assertion in a Trust Services engagement is most likely to result in which of the fol lowing types of opinions? a. Adverse. b. Disclaimer. c. Qualifi ed. d. Unmodifi ed with explanatory language

Answer 192

142. (b) The requirement is to identify the most likely report when a client refuses to provide a written assertion in a Trust Services engagement. Answer (b) is correct because this represents a scope limitation, and client imposed scope limitations are most likely to result in a disclaimer of opin ion. Answer (a) is incorrect because an adverse opinion is appropriate when a CPA believes that the information is so misstated as to be misleading. Answer (c) is incorrect because client imposed scope limitations generally result in disclaimers, not qualifi ed opinions. Answer (d) is incorrect because an unmodifi ed opinion is most likely not appropri ate in such a circumstance.

Question 193

143. Dunn, CPA, is auditing the fi nancial statements of Taft Co. Taft uses Quick Service Center (QSC) to process its payroll. Price, CPA, is expressing an opinion on a description of the controls implemented at QSC regarding the processing of its customers’ payroll transactions. Dunn expects to consider the effects of Price’s report on the Taft engagement. Price’s report should contain a(n) a. Description of the scope and nature of Price’s procedures. b. Statement that Dunn may assess control risk based on Price’s report. c. Assertion that Price assumes no responsibility to determine whether QSC’s controls are suitably designed. d. Opinion on the operating effectiveness of QSC’s internal controls.

Answer 193

143. (a) The requirement is to identify the information provided in a service auditor’s report which includes an opinion on a description of controls implemented. Answer (a) is correct since such a report includes a description of the scope and nature of the CPA’s procedures. Answers (b), (c), and (d) are all incorrect because they suggest information not included in such a report. See AU-C 402 for information on the audit of service organizations.

Question 194

144. Payroll Data Co. (PDC) processes payroll transactions for a retailer. Cook, CPA, is engaged to express an opinion on a description of PDC’s internal controls implemented as of a specifi c date. These controls are relevant to the retailer’s internal control, so Cook’s report may be useful in providing the retailer’s independent auditor with information necessary to plan a fi nancial statement audit. Cook’s report should a. Contain a disclaimer of opinion on the operating effectiveness of PDC’s controls. b. State whether PDC’s controls were suitably designed to achieve the retailer’s objectives. c. Identify PDC’s controls relevant to specifi c fi nancial statement assertions. d. Disclose Cook’s assessed level of control risk for PDC.

Answer 194

144. (a) The requirement is to identify a CPA’s reporting responsibility when reporting on internal control implemented for a service organization that processes payroll transactions. Answer (a) is correct because since the CPA is only expressing an opinion on whether controls have been implemented, a disclaimer should be provided on operating effectiveness. Answer (b) is incorrect because no specifi c statement is made with respect to earlier objectives. Answer (c) is incorrect because controls relevant to fi nancial statement assertions are not so identifi ed. Answer (d) is incorrect because the assessed level of control risk is not disclosed. See AU-C 402 for information on processing of transactions by service organizations.

Question 195

145. The auditor who audits the processing of transactions by a service organization may issue a report on controls Implemented Operating effectiveness a. Yes Yes b. Yes No c. No Yes d. No No

Answer 195

145. (a) The requirement is to determine whether an auditor who audits the processing of transactions by a service organization may issue a report on either, or both, of whether controls have been implemented and control operating effectiveness. Answer (a) is correct because AU-C 402 indicates that such “service auditors” may issue either of the two types of reports.

Question 196

146. Computer Services Company (CSC) processes payroll transactions for schools. Drake, CPA, is engaged to report on CSC’s policies and procedures implemented as of a specifi c date. These policies and procedures are relevant to the schools’ internal control, so Drake’s report will be useful in providing the schools’ independent auditors with information necessary to plan their audits. Drake’s report expressing an opinion on CSC’s policies and procedures implemented as of a specifi c date should contain a(n) a. Description of the scope and nature of Drake’s procedures. b. Statement that CSC’s management has disclosed to Drake all design defi ciencies of which it is aware. c. Opinion on the operating effectiveness of CSC’s policies and procedures. d. Paragraph indicating the basis for Drake’s assessment of control risk.

Answer 196

146. (a) The requirement is to identify the proper information to be included in a service auditor’s report on whether a client’s controls have been implemented. Answer (a) is correct because such a report should include a description of the scope and nature of the client’s procedures

Question 197

147. Lake, CPA, is auditing the fi nancial statements of Gill Co. Gill uses the EDP Service Center, Inc. to process its payroll transactions. EDP’s fi nancial statements are audited by Cope, CPA, who recently issued a report on EDP’s internal control. Lake is considering Cope’s report on EDP’s internal control in assessing control risk on the Gill engagement. What is Lake’s responsibility concerning making reference to Cope as a basis, in part, for Lake’s own opinion? a. Lake may refer to Cope only if Lake is satisfi ed as to Cope’s professional reputation and independence. b. Lake may refer to Cope only if Lake relies on Cope’s report in restricting the extent of substantive tests. c. Lake may refer to Cope only if Lake’s report indicates the division of responsibility. d. Lake may not refer to Cope under the circumstances above.

Answer 197

147. (d) The requirement is to determine the propriety of a computer “user” auditor (Lake) making reference to a service auditor’s (Cope) report. Answer (d) is correct because the user auditor should not make reference to the report of the service auditor. See AU-C 402 for reports on the processing of transactions by service organizations.

Question 198

148. Which of the following is correct relating to service orga - nization control (SOC) reports referred to as “SOC 2” re ports? a. They are primarily to assist fi nancial statement au ditors when processing services have been out sourced to a service provider. b. They are generally available to anyone. c. They relate most directly to internal control over fi - nan cial reporting. d. They are meant for management of service or ganiza tions, user entities and certain other specifi ed entities.

Answer 198

148. (d) The requirement is to identify the item that is true about SOC 2 reports. Answer (d) is correct as such reports are meant for management of service organizations, user entities and certain other specifi ed entities. Answer (a) is incorrect because it is SOC 1 reports that are meant pri marily to assist fi nancial statement auditors. Answer (b) is incorrect because the reports are not meant to be generally available. Answer (c) is incorrect because they relate more directly to the SysTrust principles than they do to internal control over fi nancial reporting.

Question 199

``` 149. The type of service organization control (SOC) report that is for general use is a. SOC 1. b. SOC 2. c. SOC 3. d. SOC 4. ```

Answer 199

149. (c) Answer (c) is correct because an SOC 3 report is a general-use report. Answers (a) and (b) are incorrect be cause SOC 1 and SOC 2 reports are restricted-use reports. Answer (d) is incorrect because no SOC 4 report exists.

Question 200

150. The AICPA has outlined auditor reports based on three services that may be provided on service organization controls (SOC). The type most likely to result in a restricted use report on controls at a service organization related to security, availabil ity, processing integrity, confi dentiality, and/or privacy is a. SOC 2. b. SOC SYS. c. SOC 6. d. SOC OC.

Answer 200

150. (a) The requirement is to identify the type of service organization control report most likely to result in a restricted use report on security, availability, processing integrity, confi dential ity, and/or privacy. Answer (a) is correct as an SOC 2 report is restricted and on such content. Answers (b), (c) and (d) are all incorrect because no such reports exist. The AICPA has issued three service organizations control reports: • SOC 1: Restricted use reports on controls at a service organization relevant to a user entity’s internal control over fi nancial reporting. • SOC 2: Restricted use reports on controls at a service organization related to security, availability, processing integrity, confi dentiality, and/or privacy. • SOC 3: General use SysTrust reports related to secu rity, availability, processing integrity, confi dentiality, and/or privacy.

Question 201

151. The internal control provisions of the Sarbanes-Oxley Act of 2002 apply to which companies in the United States? a. All companies. b. SEC registrants. c. All issuer (public) companies and nonissuer (nonpublic) companies with more than $100,000,000 of net worth. d. All nonissuer companies

Answer 201

151. (b) The requirement is to identify the type of companies to which the internal control provisions of the Sarbanes-Oxley Act of 2002 apply. Answer (b) is correct because the provisions apply to public companies that are registered with the Securities and Exchange Commission. Answer (a) is incorrect because nonissuer companies are not directly affected by the control provisions. Answer (c) is incorrect; there is no $100,000,000 requirement. Answer (d) is incorrect because nonissuer companies are not directly affected by the internal control provisions of the Act.

Question 202

152. The framework most likely to be used by management in its internal control assessment under requirements of the Sarbanes-Oxley Act of 2002 is the a. COSO internal framework. b. COSO enterprise risk management framework. c. FASB 37 internal control defi nitional framework. d. AICPA internal control analysis manager.

Answer 202

152. (a) The requirement is to identify the most likely framework to be used by management in its internal control assessment. Answer (a) is correct as the COSO internal control framework (either the original, or the 2013 revision) is by far the most frequently used one. Answer (b) is incorrect because while a COSO enterprise risk management framework does exist, it is not ordinarily used by management in its internal control assessment. Answers (c) and (d) are incorrect because there is no such thing as a “FASB 37 internal control defi nitional framework” or an “AICPA internal control analysis manager.”

Question 203

158. In an integrated audit, which of the following is defi ned as a weakness in internal control that is less severe than a material weakness but important enough to warrant attention by those responsible for oversight of the fi nancial reporting function? a. Control defi ciency. b. Unusual weakness. c. Unusual defi ciency. d. Signifi cant defi ciency.

Answer 203

158. (d) The requirement is to identify the term that is defi ned as a weakness in internal control that is less severe than a material weakness but important enough to warrant attention by those responsible for oversight of the fi nancial reporting function. Answer (d) is correct because this is the defi nition of a signifi cant defi ciency. Answer (a) is incorrect because a control defi ciency exists when the design or operation of a control does not allow management, or employees, in the normal course of performing their functions to prevent or detect misstatements on a timely basis. Answer (b) is incorrect because an unusual weakness is not used in the standards for integrated audits. Answer (c) is incorrect because the term unusual defi ciency is not used in the standards for integrated audits.

Question 204

159. A material weakness is a signifi cant defi ciency (or combination of signifi cant defi ciencies) that results in a reasonable possibility that a misstatement of at least what amount will not be prevented or detected? a. An amount greater than zero. b. An amount greater than zero, but at least inconsequential. c. An amount greater than inconsequential. d. A material amount.

Answer 204

159. (d) The requirement is to identify the amount involved with a material weakness. Answer (d) is correct because a material amount is involved. Answers (a), (b), and (c) are all incorrect because they suggest smaller amounts.

Question 205

160. The minimum likelihood of loss involved in the consideration of a control defi ciency is a. Remote. b. More than remote. c. Probable. d. Not explicitly considered.

Answer 205

160. (d) The requirement is to identify the minimum likelihood of loss involved in the consideration of a control defi ciency. Answer (d) is correct because a control defi ciency is a condition in which the operation of a control does not allow management, or employees, in the normal course of performing their functions to prevent or detect misstatements on a timely basis—it does not explicitly consider likelihood of loss. Answer (a) is incorrect because the minimum likelihood of loss is not considered. Answer (b) is incorrect because the control defi ciency occurrence of loss need not be more than remote. Answer (c) is incorrect because whether the minimum likelihood of loss is probable is not considered.

Question 206

161. Assume that a company has a control defi ciency regarding the processing of cash receipts. Reconciliation of cash accounts by a competent individual otherwise independent of the cash function might make the likelihood of a signifi cant misstatement due to the control defi ciency remote. In this situation, reconciliation may be referred to as what type of control? a. Compensating. b. Preventive. c. Adjustive. d. Nonroutine.

Answer 206

161. (a) The requirement is to identify the type of control that reconciliation of cash accounts represents. Answer (a) is correct in that it is a compensating control which supplements a basic underlying control, in this case basic information processing controls related to cash. Answer (b) is incorrect because a preventive control prevents errors or fraud from occurring. Answer (c) is incorrect because the term “adjustive” control is not ordinarily used. Answer (d) is incorrect because “nonroutine” is ordinarily considered a type of transaction (e.g., the year-end close process), not a type of control.

Question 207

162. According to Public Company Accounting Oversight Board auditing standards, what type of transaction involves establishing a loan loss reserve? a. Substantive transaction. b. Routine transaction. c. Nonroutine transaction. d. Estimation transaction.

Answer 207

162. (d) The requirement is to identify the type of transaction that establishing loan loss reserves is. Answer (d) is correct because estimation transactions are activities involving management’s judgments or assumptions, such as determining the allowance for doubtful accounts, establishing warranty reserves, and assessing assets for impairment. Answer (a) is incorrect because the term substantive transaction is not used in PCAOB standards. Answer (b) is incorrect because routine transactions are those for recurring activities, such as sales, purchases, cash receipts and disbursements, and payroll. Answer (c) is incorrect because nonroutine transactions occur only periodically, such as the taking of physical inventory, calculating depreciation expense, or adjusting for foreign currencies; nonroutine transactions generally are not a part of the routine fl ow of transactions.